Autocall gives access to the world’s top value stocks

Brian McMillan of Investec Structured Products

As many as 60% of investors are actively looking to change their investment approach in response to how markets have recalibrated to the Covid-19 pandemic.  

So, while there is a longstanding divide within the investment community, between those who favour value investing and those who favour growth – investment behaviour is shifting. 

While each style has had its time in the sun, growth has been particularly dominant in recent years, this shift is expected to increase in the early part of 2021. 

Growth shares are characterised by high revenue and earnings growth rates, often trading at high multiples, while value shares typically trade at lower multiples but are regarded as having solid fundamentals.

Helped along by technological innovation, cheap money and, more recently, the economics of the Covid-19 pandemic, growth companies – led by the large cap technology companies – have outperformed their value counterparts by their largest margin than at any time in history.

This extreme position appears to support the case for switching towards value as an investment theme. Many of the underlying forces that could shift the balance in favour of value are already playing out, such as:

  • The roll-out of vaccine programmes around the world, which could see most developed economies reach herd immunity towards the end of this year and most emerging markets at some point next year – implying an ongoing re-opening of countries and an increase in economic activity
  • Ongoing fiscal support by the world’s governments, including US President Joe Biden’s stimulus package (which could be worth as much as US$1.9 trillion) and similar packages in Europe
  • Continued accommodative policies by central banks designed to support households and businesses until the pandemic is under control.

A number of asset classes have already started to reflect this changing dynamic. Commodity prices have recovered since their lows of March and April last year, with oil prices back above where they were in January last year, and US and other developed country government bond yields have risen while yield curves have steepened. 

Stocks that were hard hit early in the pandemic have made healthy gains too. From airlines to banks and oil companies, sectors geared to a return to a normal world have seen their share prices appreciate of late. 

Given such a scenario, many investors are understandably looking to switch from growth into value right now. However, such a strategy is not without risk – history has shown that market trends can stay entrenched for long periods. We also know that calling turning points in the market, or timing the market, can be a fool’s errand for most investors.

Furthermore, the value trade itself can be subject to short-term rises in volatility, caused, for example by setbacks in vaccine rollouts or the emergence of new strains that could delay the process of economic normalisation. 

Brian McMillan of Investec Structured Products says investors may therefore look to build some protection into their positioning, to minimise the impact of these economic shocks. He points to the new Investec USD S&P 500 Value Index Autocall as a way for investors to gain exposure to the global value sector in a way that also provides protection against the downside risks.

“The Autocall is a maximum five-year US dollar-denominated investment, which will automatically be redeemed after either three or four years if the USD S&P 500 Value Index rises or is flat. The USD S&P 500 Value Index Autocall earns a cumulative simple return of 8% per annum, provided the underlying index rises or is flat over the period,” he explains. 

“The S&P 500 Value Index represents a number of blue chip value companies in the US, many of which are well known global brands, including sectors like banks, energy, media, healthcare, information technology and consumer staples,” he points out.

McMillan adds that the Autocall should also suit investors who want to avoid the risk of capital loss – which would be the case for those buying an exchange-traded fund or other index-linked investment.  “Investors are protected on the downside – you get your full capital back after five years if the index drops by no more than 30%,” he notes.

The Autocall should also suit SA residents who wish to invest in rand, without having to access their offshore allowance or asset swap facilities. However, the underlying investment is US dollar-linked, providing hard currency exposure.

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