In this bleak economic climate, safe bets still exist
WHEN it comes to the world markets, the global economy and our personal savings, we remain in an uncertain climate.
There are myriad opinions out there as to which way the markets - and the economies of the world - will go. Some say the worst is over while others say the worst is yet to come. Many experts and analysts are hoping that the second-quarter earnings season - which began last week - will give a proper indication as to the direction of the markets.
Regardless of who might be right and who is wrong, the number of private individuals wishing to save appears to be climbing (the US savings rate reached 6.9 percent in May, a 15-year high).
The question is therefore - given all this uncertainty - what should we invest in? The answer: structured notes.
Bank-structured notes allow an investor to make a reasonable return while protecting against major losses. They allow investors to stay in markets without too much risk.
Most structured notes are issued by investment banks or their affiliates, and they usually have a lifetime of one to five years. As a general rule, the longer the note the higher the level of capital protection.
As an example of how a typical structured note works, let's take the Exane 2 Year Eur 200 percent Jump Certificate Natural Gas structured note. This particular product allows investors to invest in the natural gas sector of the market by purchasing the Natural Gas Index and provides investors with the opportunity to enjoy capital protection as well as 200 percent of the potential return within set parameters.
The day the note is issued the initial strike price is set. At maturity, two years later, the return is assessed. If the note has risen by 40 percent or more, the return to the investor is capped at a maximum of 80 percent. So if the return of the Natural Gas Index is 50 percent, the investor's return would be capped at 40 percent by 2 - 80 percent. This is the maximum upside. Any returns between 0 percent and 40 percent are doubled (for example, a 20 percent return on the index is a 40 percent return to the investor).
However, there is a downside. The investor is guaranteed a return on capital as long as the index has not fallen more than 35 percent. This leaves a wide berth for potential losses and a good level of protection for the investor.
With this particular structured note, if the index does drop more than 35 percent, instead of being forced to sell at that time at a loss, the bank then transfers the iShares that the note is invested in to the investor. The investor can then hold those iShares until they recover. So instead of being forced to sell at exactly the date the product matures, there is a choice of holding the iShares until their value increases.
A structured note will allow an investor to make gains up to a certain amount while at the same time limiting the amount of a loss should the unfortunate occur. So with uncertainty still prevalent, structured notes could be a suitably stable proposition.
Trevor Keidan is managing director of Infinity
Financial Solutions. Should you wish to contact
Trevor send an email to [email protected].