We live in unusual times in the markets. Having nursed itself back to health after the global financial crisis 10 years ago, the world economy faces new challenges – trade wars and a populist backlash against globalisation have created renewed uncertainty for investors.
Meanwhile low inflation and fears that trade wars could translate into a global recession have forced the world’s leading central banks to look to loosen monetary policy further, at a time when they might have been expected to have unwound the stimulus programmes adopted after the financial crisis.
Investors are even facing a new phenomenon – negative interest rates. “In some developed economies, depositors are not just forgoing interest on their money, they are also having to pay their banks to keep their money,” says Brian McMillan of Investec Structured Products.
“Meanwhile bonds with negative yields are now not just a curiosity, but the norm in many countries. About 30% of global bonds – a staggering US$17 trillion worth (US$1 trillion of it corporate bonds) – are trading in negative territory.”
McMillan says this would be less concerning for investors if the upside case for global equities was strong. “But Wall Street is currently in its longest bull phase in history (3461 days as at the end of August), so equity market investors are understandably edgy,” he points out.
Those looking to invest offshore find themselves on the horns of a dilemma. Invest in cash or bonds and earn a low or negative return? Or invest in global equities and take on the risk of a market correction? It’s the classic “return on capital vs return of capital” dilemma.
Is there a third way? Can investors earn a decent return while enjoying downside protection? McMillan says there are locally available investments, listed on the JSE, offering the investor exposure in US dollars or rands, to the S&P500 and Eurostoxx50 Indices, that are designed with addressing this need in mind.
“Investors can choose the currency exposure and international index they prefer – while also enjoying a high enhanced return relative to prevailing US dollar interest rates if the index rises or is flat on each of the annual call dates,” McMillan explains.
So how do these investments work?
Using Investec’s Autocall as an example;
- The Autocall is a maximum five-year, JSE-listed investment linked to the performance of the Eurostoxx50 Index (in rands or US dollars) and the S&P500 Index (in US dollars). The Autocall will mature at the end of year five, but may be subject to annual Automatic Call Dates at the end of years one, two, three or four.
- The Autocall pays a cumulative enhanced return per annum (in US dollars or rands) converted back into rands on expiry, if the Index is flat or positive, on an Automatic Call Date.
- Investors enjoy 100% downside protection in rands, provided the Autocall does not end more than 40% lower (30% on S&P500) on the expiry date.
“These structured investments are aimed at addressing key investor needs for downside protection and an attractive return in difficult markets, without the investor having to back a particular market outcome,” argues McMillan.