Growth and protection in a post-Covid-19 world

Global markets have entered a new phase. Despite the knocks to growth caused by Covid-19, stock markets have largely recovered their losses for the year, thanks to huge monetary and fiscal interventions by the world’s leading central banks and governments.

Investors face a number of unknowns, ranging from how much longer the pandemic will have an impact on global movement and economic growth, to the longer-term effects of government spending and loose monetary policy.

At the same time, low global interest rates mean that investors are not earning much of a return (and in some cases, no return at all) for staying on the side-lines. Will higher inflation re-emerge and how will central banks respond? Which sectors and asset classes will perform best in this new world? And which currencies are likely to be the winners?

In this environment, investors would be well-advised to seek out strategies that offer both a measure of protection and participation in the upside over the medium term.

With this in mind, Investec has launched a new structured product, the USD S&P 500 Autocall, which addresses these requirements, while also offering US dollar exposure to the US equity market, but is listed on the JSE in a similar manner to the inward listed ETFs.

“The S&P 500, with its high percentage of technology stocks, including growth areas like e-commerce and cloud computing, has proven highly resilient over the Covid-19 pandemic,” argues Brian McMillan, of Investec Structured Products.

“The investment also provides diversification from a typical JSE portfolio, with exposure not just to the tech giants, but also to US financials, healthcare and consumer stocks – as well as other sectors,” he adds.

With an investment term of up to five years, the structure uses the popular autocall feature. If the S&P 500 trades at or above the initial investment level on the third, fourth or fifth anniversary of the issue date, it will “autocall” at that point. This means investors will receive an 8% cumulative, enhanced dollar return. For example, if the investment autocalls after three years, investors will get their capital back plus 24% (three times 8%); if it calls after four years, the returns is 32%.

Initial capital is protected, up to a decline over the period of 40% in the S&P 500. McMillan notes that back tests on the S&P 500 show that over no five-year period in the last 20 years would the investor have experienced a loss in the autocall, even through the financial crisis of 2008.

“A hypothetical autocall issued any time over the same period would have autocalled in year three 70% of the time,” he explains. “In 11% of cases it would have autocalled in year four or five, while in 19% of cases it would not have called – however in every instance the investor would have at the least received their full initial investment back.”