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New structured product allows investors to ride the waves of global equity market volatility

23 October 2020 Investec Structured Products

In these turbulent markets, many investors are looking at broad, global benchmarks for their investments and to reduce their stock selection risk by tracking indices. According to research by Investec Structured Products, only 50% of global funds outperformed a Global Diversified World Price Only Index after fees, over the last five years to July.

In response, Investec Structured Products is launching a new investment, called Advanced Investment Holdings Limited. The investment offers participation across four of the world’s leading markets by region, namely the US, Europe, Japan and emerging markets, but with 100% downside protection.

The investment is linked to the S&P 500 (40%), the Eurostoxx 50 (30%), the Nikkei 225 (15%) and the MSCI Emerging Market Index (15%).

“Our simulations show that if investors had applied the strategy proposed by Advanced Investment Holdings Limited over the last 20 years then they would’ve avoided the sharp drawdown that took place for the period around the Global Financial Crisis,” says Lubbe.

“The investment offers participation in all of the major global equity investment themes – from US tech to Asian tech, and from European recovery to commodity strength,” argues Lubbe.

One of the concerns for investors right now is the impact of second waves of Covid-19 on many of the world’s leading economic regions, such as Europe and the US.

Thanks to improved treatments, better testing and tracking methodologies, it’s unlikely governments will have to resort to the draconian measures introduced earlier this year. However the second wave has created enough doubt about the feasibility of a synchronised recovery across the world. Timelines for vaccines and therapeutics remain uncertain, while rolling out the vaccines and treatments will also likely be a lengthy and uneven process, with some countries ahead of others in the process.

Add in other unknowns, such as the outcome of the US elections in November and the end result is an unclear outlook for all leading asset classes. While equities have generally been the best option for investors over the long run, it is difficult to call, against the uneven backdrop sketched above, which geographies and sectors will offer the best returns. However, many investors will still prefer equities in an environment of very low prevailing and expected interest rates.

A globally diversified equity portfolio is generally regarded as the best strategy over a long-term horizon. Diversification across geographies and sectors can also offer good risk-adjusted returns over the short and medium-term, but investors will still face some degree of volatility.

“In an environment in which it’s difficult to call which sectors will perform in a late pandemic world and in the transition to a post-pandemic world, we believe the four markets in the ratios we’ve chosen, offer a reasonable mix of the key themes and regions over the next few years,” says Lubbe.

Advanced Investment Holdings Limited is a five-year investment, with 100% downside protection if the investor remains invested for the full term. The investment is in US dollars, with a minimum investment of US$13,000.

Structured products provide principal protection through the assumption of credit risk. They are intended for sophisticated investors who understand and accept the risks associated. In this case, the principal preservation is in USD by means of an Investec Bank Limited (“Investec”) USD Credit Linked Note (“CLN”), referencing The Republic of South Africa (“SAGOV”) Thus, the principal protection is applicable to the extent that both Investec (i.e. the issuer of the CLN) and the SAGOV continue to honour any outstanding obligations. Investors must be comfortable with this risk before investing in the product.

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