Diversify your portfolio with international structured products
If you live in a country with a weak currency, then you would probably see the sense in taking money offshore to store and invest in a major currency. The overriding benefit of this move is that your international buying power won’t be eroded because your currency is devaluing against the likes of the US dollar, pound sterling or euro.
However, the most important benefit is that you’re diversifying the risk in your portfolio. By moving your capital into a more stable currency you not only limit the possibility of exchange rate devaluation, but also gain exposure to a wider universe of investment opportunities.
Diversifying your portfolio risk is the cornerstone of a prudent investment strategy that aims to deliver maximum results within your risk tolerance.
This is a principle understood by investors around the globe, although probably appreciated most by those in countries with a weak currency. If your currency is continually weakening against the majors, then this has significant implications for your long-term wealth plans.
The threat of inflation
Fears that inflation will eat into your future well-being is a new reality that many younger investors have had little cause to contemplate. But the response by central banks to raise interest rates in an attempt to temper consumer appetite for credit is causing headaches for investors of all descriptions.
The immediate impact of rising inflation is diminished consumer spend, which in turn threatens the global economic recovery.
According to the World Bank, global growth is expected to nearly halve from 5.7% in 2021 to 2.9% in 2022. This is significantly lower than the 4.1% growth projected at the beginning of the year, with prospects for the next year or two remaining largely unchanged at this lower level.
The news for investors in emerging and developing economies is equally bleak, with the World Bank revising growth downward in 70% of these countries. Emerging market growth is projected to fall from 6.6% in 2021 to 3.4% in 2022, which is well below the annual average of 4.8% between 2011 and 2019.
In the face of these threats, investors cannot afford to sit by if they hope to emerge with their portfolios intact from the latest uncertainty. And although drastic action is not advised, judicious shifts in capital allocation can help to counter some of these negative effects.
Uncertainty need not be guaranteed
One critical consideration if you do choose to rebalance your portfolio is to find assets or instruments that can deliver above-inflation returns. In the current environment, that rules out the safety of cash or money market instruments that struggle to produce sufficient returns.
It doesn’t hurt, then, to take a look at instruments like Standard Bank’s Structured Products that offer some degree of market-related growth but with less associated risk.
This is possible because the products are structured to take advantage of opportunities in the market that can deliver positive returns. However, you get downside protection by having at least your initial deposit protected.
For instance, a structured product could track the performance of low volatility indices linked to European, US or Australian equity markets. The advantage this holds over traditional individual stock trading is that the indices are made up of a larger basket of shares that don’t suffer the same volatility as individual stocks.
The lower volatility and diversification help to reduce risk, particularly compared to investing in individual stocks. Add to this the product’s capital protection*, and you receive back your initial deposit after the five-year term has expired even if markets have turned negative.
Another example of how you can limit uncertainty is a Defined Return Structured Product that offers you a minimum return even if market performance is negative over the term of your deposit. If the market is flat or positive over this four-year period, you will receive a defined return that is set at the start of your deposit term.
It is highly unlikely that one single solution or strategy can protect you from the effects of rising inflation and market volatility. But if you’re looking for protection on some of your capital, then a Structured Product is a smart alternative.
*Capital protection refers to the Product’s design to repay your original deposit in full, in the deposit currency, providing you retain your deposit to the Maturity Date.