The COVID-19 pandemic has put an abrupt end to the bull market in global equities, while introducing a new world of uncertainty for investors. With no guarantee of a vaccine or cure being found in the short term, sentiment may well remain weak for a while. Investors may hope that stimulus measures around the world – both during the crisis and in its aftermath – will underpin equities, and so may see the current market level as a good entry point.
The risk of a further pullback in markets remains high, however, especially if there is poor news flow on combatting the disease. This makes calling the bottom of the market a dangerous strategy. One way to offset this risk is to seek protection by continuing to hold a cash position. Investors could invest in the market while keeping an allocation in cash to smooth out any volatility. However, with central banks cutting rates, after-tax returns on cash are likely to be very low.
Alternatively, one could invest in the equity market and then take out protection by purchasing a put option, but the cost of buying the option would be about 16% of the value of the investment – resulting in the investor only enjoying 84% of the upside of any market return.
One solution is to take up exposure to equities through a structured product. Structured products allow investors to get geared returns with capital protection. These products also allow investors to invest in specific themes not easily accessible in the market. China Seas Basket Limited is a good example of a structured investment that offers a thematic, protected investment with meaningful upside. The investment is a three-year and 10-month investment that references the Euronext CDP Environmental World Index – a globally recognised environmental, social and governance (ESG) index. Investors achieve 110% of the upside returns of the index, with no upside cap, over the period (in other words, if the index returns 20%, the investor’s return is 22%). The investment is 100% protected to the downside, over the full period.
“The investment is ideal for investors who have a positive view on the market over three years, but who are conscious of the risks in the short term,” argues Japie Lubbe of Investec’s financial products team. “The geared return should be particularly attractive for those who see markets gaining over the period.” Sonia Lynch, also of the financial products team, adds that the reference to the Euronext CDP Environmental World Index should appeal to the ESG-conscious investor. “There is a view that businesses with a sustainable model, where ESG ranks high among key performance indicators, will emerge strongest out of the current crisis,” she says.
Historically, investing in companies that rank highly on an ESG basis have outperformed the market by up to three percentage points a year, according to research by Bank of America Merrill Lynch. The Euronext CDP Environmental World Index also has an 83% correlation with the MSCI World Index. The Euronext CDP Environmental World Index is an equal-weighted index of 40 of the world’s best-ranking companies according to their ESG scores (out of a universe of 400 of the largest companies in North America and Europe).
The index includes mainly a mix of tech, financials, telcos and consumer staples, with a 50% North America and 50% Europe split. The principal protection is linked to Standard Bank Subordinated Debt, with the minimum investment US$10 000, or A$14 000. “As a dollar investment, the China Seas Basket could well suit investors holding dollars in an offshore account, currently at extremely low interest rates,” says Lubbe. The investment closes on 10 July.