My structured product pick for February
Many analysts have predicted 2020 will be a choppy year for investors, but NO ONE could have anticipated a threat like the Coronavirus. And, although many of you have likely heard of the disease, I believe most people are yet to understand its implications.
According to most estimates, this appears to be a very infectious sickness (twice as high as a normal flu) with a moderate death rate (less than 3%).
To put this into perspective: In the US, the flu infects 8% of the population on average each year.
Something that is twice as infectious could easily reach over a billion people worldwide. If we do see such a massive number of infections, the relatively low death rate will still translate into about 30 million dead. Making this one of the greatest killers in history.
Just last week, we had massive spike in the number of infected after lung imaging technology helped identify previously undiagnosed people.
As you would expect global markets have tried to price in this risk, mostly through falling commodity prices.
I believe this is a mistake. If the virus does become a major threat, there is no reason commodities would be the worst affected sector.
If on the other hand the threat does not materialise, we could be seeing a great opportunity to buy bargains in the sector.
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A safer way to invest in markets
That bring me to my structured product pick for February. It’s based on the FTSE 100 which has reacted much more negatively to the Coronavirus than any major stock index outside of China. This is probably due to its large commodity sector.
Today’s investment pick is an Autocall structure which runs for a maximum of 5 years but can pay out in as little as 2 years with a 9.5% annual return (in USD) if the index positive. Given what we know about the virus it’s unlikely to be a factor for the entire period of investment and you have a good chance of seeing a market recovery over this period.
Your capital is guaranteed as long as the index isn’t down by more than 30% after 5 years.
That’s right if after 5 years the market is down up to 30% you will get all your money back!
On the upside, a 9.5% USD annual return compares very favourably to the S&P average return historically. Especially when you factor in the capital protection and the very undemanding requirement for the FTSE 100 to just be flat or up slightly.
That means if the index returns 0.1% in the 5th year you still get the total 9.5% (per year) for the full period of investment!
Even though there was next to no market return!
It is very unlikely you’ll see the FTSE 100 down over 5 years, while the S&P other major indices are returning over 9% a year in spite of you having to take the full downside risk.
Both the pay out and the guarantee are in USD. Historically the USD has been viewed as a safe haven, meaning that investors flock to in when there is a crisis. Even when the crisis is based in the US, such as 9/11, we say the USD strengthen vs emerging many currencies.
Rand Swiss, Wealth Manager