Publications
Partners
Cape Town - Investec economist, Chris Hare, believes the US is now on a solid, if not spectacular course that will see the economy continuing to strengthen over the next few years. The labour market is tightening and the prospects are that inflation will start rising as wage growth also improves.
Nonfarm payroll employment in the US has grown ahead of expectations for four of the last five months. The figures for February also showed that average hourly earnings had risen by 2.2% year-on-year. Ultimately, these improvements will have a positive impact on US equity markets as growth will lift investor sentiment.
“I would expect the US market to be one of the star performers in terms of developed economies over the next few years,” said Hare. “Given that there are quite a lot of risks to the global economy and emerging markets, I think the US will continue to be some sort of safe haven in an uncertain world.”
This is an important consideration for investors in emerging markets like South Africa. It is important to diversify into developed markets that are more stable, and the US offers the best prospects in this regard, in his view.
The question, however, is what is the best way for local investors to gain exposure to this market in a way that can maximise gains in US Dollars and limit risks? Even though the outlook for US equities is reasonably positive, there are still concerns. Uncertainty around China’s fundamentals, the Federal Reserve’s monetary policy outlook and the Donald Trump factor, all weigh in on what should be an interesting next 5 years for the US, he pointed out.
This is what makes the use of structured products a compelling option. These investments are able to offer both the prospect of equity-like returns, as well as a degree of capital protection, he added.
“Structured products bring a level of certainty from a payoff perspective, which investors appreciate, especially when dealing with foreign markets,” said Ryan Sydow, head of retail distribution at Absa Corporate and Investment Bank. “Particularly having local providers offering dollar solutions also brings a level of familiarity.”
The Investec US$ Digital+ product closes in May. It is linked entirely to the performance of the S&P 500, and has a 3.5 year term. It provides a minimum US dollar return of 25% should the index end positive, as well as 100% of any upside beyond that. Capital in this product is also protected provided the index does not fall by more than 30% at any time.
The Investec structured products team tested 15 760 different investment periods from 1950 to analyse how the product is likely to perform, and their study showed that it would have delivered positive returns 84% of the time. Just 3% of the time investors would have had their original capital returned to them, and 13% of the time returns would have been negative.
The average return was 35.89% in US dollars, which is 9.16% annualised.
Brian McMillan, Investec’s structured products head of retail sales, explained that the digital component refers to the fact that through the use of bonds and derivatives investors are able to receive a binary pay-off profile. “Simply put, this means that the underlying index only needs to click into the positive for the investor to get a very attractive minimum payoff.”
Disclaimer: Fin24 cannot be held liable for any investment decisions made based on the advice given by independent financial service providers. Under the ECT Act and to the fullest extent possible under the applicable law, Fin24 disclaims all responsibility or liability for any damages whatsoever resulting from the use of this site in any manner.
