Looming recession sees investors looking for growth and protection in a volatile global equity market

by | Nov 7, 2022

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Markets have gone through a great deal of turmoil lately. In the West, central banks now have the bit between their teeth when it comes to tackling 40-year high inflation rates. Meanwhile, China is grappling with low growth, the result of its zero-Covid policies, an embattled property sector and a clampdown on the technology sector.

All of the above have increased the likelihood of a global recession, resulting in a general selloff in global equities.

In this kind of market, many investors are seeking to minimise their exposure to global equities, by switching to cash or cash equivalents. While this approach can certainly help investors protect themselves from the downside if markets deteriorate further, it means they still face the risk of having to time their re-entry into the equity market.

One way to tackle these two different risks is through an investment in a capital-protected structured investment that provides upside participation in a rising market, argues John Sherry, of Investec’s Structured Products team.

Sherry cites the example of Investec’s new Global Protected Growth, a five-year investment linked to the world’s leading equity market indices, with a 100% capital protection (in US dollars) at maturity.

Returns are linked to a diverse basket of indices (in US dollars), with exposure to a mix of developed and emerging markets: the S&P 500 (40%), the Euro Stoxx 50 (30% weighting), Nikkei 225 (15% weighting) and the iShares Emerging Markets ETF (15% weighting). The basket has about a 98% correlation with the MSCI All Country World Index. 

The product is geared 150% (one-and-a-half times) to the index basket, capped at 40%. “In other words, if the underlying index rises 10%, the investor will receive a return of 15%,” explains Sherry. “The maximum return is therefore 60% (1.5 times 40%).”

Sherry says the product was designed with investors in mind who believe in the long-term potential of equities but who are concerned about the volatility of markets in the short to medium term. “There’s a great deal of uncertainty in the markets at the moment, from monetary policy to the war in Ukraine and geopolitical tensions between China and the US,” he says. “In markets like these, investors are looking for investments with a meaningful return profile while at the same time protecting against any further market declines.”

Sherry says it’s with this in mind that Investec structured the Global Protected Growth investment, a product which is backed by the balance sheets of leading European banks BNP Paribas, UBS and Societe Generale, as well as CitiGroup Inc.

Investors interested in the product have until 2 December to invest in the Global Protected Growth, for a minimum of US$11,000.

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