In line with the Investec Group’s strategic tilt towards Client Centricity, in April of this year a formal Coverage function comprising key personnel from all CIB product areas was identified to coordinate sales activity across Multi-asset structured products and all Treasury flow businesses (Equities, Derivatives, FX, Credit and Rates). Institutional Coverage, aimed at SA Pension funds, Asset Managers and Hedge Funds, will be responsible for client engagement and holistic reporting cross-purposes.
First off the bat on this journey has been a chat around our best structured ideas for the current (peaking?) inflationary environment:
US risk markets held up relatively well into the March FED press conference, until the Chair stated clearly that he did not expect to cut rates in 2023, but that a pause was necessary. Bond markets have largely factored cuts this year (albeit at the expense of unprecedented inversion in the 2s/10s yield), whilst Equities seem to be caught in the quandary of net multiple reversion (lower rates will engineer higher multiples) versus the notion of whether cuts will rather be premised by a rush into recession, or worse a financial crisis. What’s clear is that Equity markets are not yet factoring the expected financial demise traditionally associated with a formal recession: Volatility is (uncharacteristically) low versus prior cycles. Adding to this malaise is a 1Q23 US earnings season (just ending), where net positive EPS surprises (against a considerable lowering of analyst expectations) have failed to indicate that growth is slowing.
The effect of the above has led investors to perhaps be more data-pivoted than ever before: All eyes these days are on US/Global CPI, Non-Farm Payrolls, and other widely covered “big figures” that will (eventually) indicate when inflation has finally peaked (and the top of the rate cycle has arrived). It has taken some time, and may take further time. Current data prints continue to challenge the notion that the US economy is fragile. Throw in the contradictory macro concerns around another US debt ceiling expiry, Chinese property woes and Growth concerns (is their re-emergence Infrastructure or Consumer-led?) and the ongoing covert economic “warfare” between the East and West, along with ongoing geo-political unrest in Eastern-Europe (and its effect on global food prices)…and we have a concoction that has bred lethargy while we await a clearer direction.
Factoring all the above, Investec Multi-Asset team has come up with the following ideas to potentially suit the times:
- The S&P is largely still expensive on net valuation basis (particularly driven of late by a big drive in Tech Stocks/FAANGS). Our Equity Derivates team is able to make SPX ZAR-Quanto Options pricing available to the market on SAFEX (Puts/Put-Spreads over the S&P Index, priced in ZAR and listed onto the local Exchange).
- Autocalls (or perhaps better, Digital Options) on SPX or Eurostoxx currently look attractive, as do Autocalls/Digitals on High Dividend Indices (as net yields rise across particularly the FTSE and Eurostoxx ambits).
- Low net Implied versus Realised Equity Volatility suggest long Variance Swaps may be worth a bet (long VIX too).
- US Recession versus Chinese (consumer-led) re-opening and the “trade war” – Chinese A shares have underperformed of late, what about buying Chinese-exposed Equities listed on European exchanges to circumvent potential regulatory risk?
- Another suggestion from our Equity Finance team was to suggest possible Long Small-Cap/Short Large-Cap Indices in the form of delta one Total Return Swaps (Long Russell 2000 vs Short S&P500, or Long S&P500 vs Short Tech ideas can be produced at an estimated funding rate of SOAF O/N +70bps/SOAF O/N -70bps using our platforms.
- Local interest rates approaching the top of cyclical range have rendered 1y to 3y Zero Coupon bonds attractive enough to offer decent subsidiary spend into equity upside (in fully capital-guaranteed Notes).
- With SA Banks still heavily long Dollars following competitive raising exercises through Covid (a willingness to show decent USD capitalization through the Crisis), short-dated Outperformance rates on MSCI-linked Equity indices are not as attractive as before - so ideas around Credit-linking are now the rage.
- CPI-linking capital guarantees are also now in vogue as inflation sways towards staying stickier for longer.
- Referencing CPI-linked SOAF in USD has been a popular trade.
- Our strategists suggest a potential disjoint between PGM prices and Equities should SA push to extreme winter levels of Loadshedding (Stage 9-10 might see a moratorium on the current concessions available to Miners, leading to a potential supply shortage into global precious metals markets?). Accordingly, its their view that PGM Commodity-Linked Notes should be entertained (adding in the potential pent-up demand for EVs should Chinese vehicle sales pick up again…)
- Palladium/Platinum substitution trades?
- Gold is currently in focus as the globe battles with recessionary fears (and global Central Banks have been piling in!). Accordingly we can structure Capital Guaranteed notes plus upside (unlimited and/or geared-to-cap versions) to spot Gold.
- Emissions Notes – Carbon Credits have shown a low-beta return profile to other asset classes in recent years (notably due to the limited supply mechanism of staged issuance by European regulators, versus growing demand at the long-end of the curve by Emitters). Our Commodities team have been active in putting together strategies to allow investors upside to EU Emissions prices in Note format.
- After SVB (The “crisis that never was”) and Credit Suisse (Debt over Equity, a Swiss-only phenomenon?) the corporate Credit market is now largely in recovery and back on a tightening trend. Our Credit team can offer trades in which to deploy funds into Offshore Bonds and/or Credits (in USD or ZAR) via packaged mechanism.
- Various curated or bespoke names could be included in Investec Bank Limited instruments that give clients exposure to the Credit risks and benefits of the stipulated reference entities.
- HY Spread tighteners may still have a way to run on the rate cuts versus recession debate, and baskets could defer default correlation.
- AT1s may still offer value, wrapped into CLNs
Portable Alpha and Fund-Linked Derivatives:
- Our technology can write Investors a Note that encompasses a hybrid Equity Beta (Index TRS) plus the alpha of a chosen Money Market fund (over cash)
- Alternatively, we are now also exploring Fund-linked Notes (straight or leveraged) capabilities
With the ZAR largely rangebound and fighting the pull from an increasingly vulnerable Dollar versus localized SA economic woes (loadshedding and fiscal stress), our FX strategists have suggested a series of FX trades that might show decent pay-offs should the ZAR breach higher levels against the USD:
- One such idea is to hedge against total grid failure by paying an indicative R53,500 premium for a potential R1m payout should the ZAR hit R22/USD on a one touch basis within a 3m period
- Or hedge translation risk by picking up a Zero-Cost USD/ZAR Fence with strikes at 15.00/17.00/21.80 (28Dec23 Expiry) – essentially the Client Sells a R15 Put (to help lift the upper bound while keeping the structure zero cost), Buys a R17 Put and Sells a R21.80 Call.
A more refined chat around all the above trade ideas will be offered to our Institutional client base here in SA, as we embark upon our next quarterly roadshow from next week.
These are just some or our ideas to get the creative ideas flowing ahead of those chats…