Recession fears drive investors to safer options
World leaders, company executives and ordinary households are all cautiously optimistic that 2023 will offer some respite from the turmoil of 2022. Nevertheless, topping the list of threats to investments and the cost of living is the possibility of a global recession. Fuelled by last year’s aggressive rate hikes, this threat looms ever larger as demand and output have started to slow around the globe.
However, tighter monetary policy alone isn’t to blame, with the war in the Ukraine creating uncertainty which is only compounded by the resultant energy, food and supply chain insecurity [repetition re. Fueling]. As a result, inflation across the globe spiked to record highs in 2022, leaving stock market portfolios reeling when markets tumbled in response.
“It’s easy to understand [the]fears, especially after we experienced one of the worst years in the markets since the 2008 financial crisis,” says Chris Berry, Head of Structured Products at Standard Bank. “So, investing at this time takes a great deal of conviction, as well as discipline to stay in the market for the long term. History shows us that even the deepest market corrections are temporary, and over long periods they are often small blips on an upward-trending graph."
Higher inflation for longer?
According to the Melville Douglas Quarterly Commentary for Q4 2022, the aggressive monetary tightening last year hasn’t yet had full effect on inflation. This means that central banks are expected to continue raising interest rates for a while still.
That could spell bad news for equities, many of which are still recovering from the dramatic downturn in 2022 that saw the S&P 500 fall 19.44%, the Dow Jones lost 8.78% and the Nasdaq finished the year 19.7% lower.
“The higher interest rate story does have a silver lining though, with cash and fixed income assets regaining their appeal as viable diversification options,” Chris says. “The low-interest rate environment that followed the 2008 financial crisis meant these types of investments delivered poor returns for a long time. But with the tables now turned, and rates expected to remain high, this appeal is expected to endure.
“The Melville Douglas view is that even though central banks have indicated a ‘wait and see approach’ before halting rate hikes, we might see interest rates peaking towards the middle of 2023.”
How to preserve wealth?
The conundrum that investors face in the current environment is trying to avoid volatility while still beating inflation. You might gain by avoiding losses if stock markets fall, but the lower-risk assets seldom beat inflation.
The merits of holding both growth and defensive assets are well known, with diversified portfolios considered the best way to grow long-term wealth.
The value of this approach is clear from the 10.4% annualised return you would have earned if you had invested £100,000 in the S&P 500 from January 2013 to December 2022. By contrast, if you’d missed just the 10 best days over this period, your annualised return would be 4.0%, which falls to only 0.7% if you missed the best 20 days.
“This illustrates the old adage that it’s time in the market, not timing the market that counts most,” Chris says. “That means also continuing to buy into the market, even during the downturns. The best way to make long-term gains is to keep putting regular amounts away over time. Once you develop this habit, you stop overanalysing and second-guessing your decisions.”
Easy route to lower risk, low-fuss deposits
Sometimes the simplest plans truly are the best. This is especially true when it comes to your long-term financial planning, Chris adds. “It’s been found that tactical asset allocation adds less than 10% of value over the long term, with 90% of value derived from long-term strategic investment.”
One way to stay committed to a long-term goal is to choose a product that restricts your impulses to cash out when markets get choppy. If you feel uneasy about some markets having lost 20% last year, then a more conservative, defensive investment is probably more appropriate for you.
“The issue with taking a wholly defensive position is that it might shield you from market volatility, but it won’t prevent inflation from eating into your future buying power,” Chris says. “You can overcome this to some extent with a blended approach that offers some certainty, but not to the exclusion of growth assets.”
What are Structured Products?
Standard Bank’s Structured Products are an investment product that allow you to make a one-time deposit that is typically tied in for a fixed period. Each structured product is designed to tap into current and future opportunities, with the aim of providing with less riskier, more predictable returns.
[The Quantum Plus 32 is an example of such a Structured Product that offers a fixed return on a portion of your deposit, with the remainder tracking the performance of a low-volatility index.]
The structure of each product differs so to provide the best chance of getting a market return while mitigating the risk of high-risk assets. Based on a low-risk bias investment strategy, it does not always exclude equities, instead taking advantage of appropriate market instruments to balance risk.
For instance, certain structured products track the performance of the S&P Europe 350 Low Volatility Index or S&P 500 Low Volatility Index. It is possible therefore to benefit from valuations potentially increasing over time with less risk of the wild swings typical of high-growth tech stocks.
Another mechanism used in structured products to preserve a deposit is the capital protection* provision which is designed such you are repaid at least your original deposit in full.
“Structured products help you to remain invested in the market, but in a way that enables you to still sleep well at night. By choosing a structured product suited to your risk profile and investment horizon, you’re able to still gain from the market even if you don’t have the appetite for 100% equity exposure,” Chris says.
[We currently have the following Structured Products accepting deposits. The Quantum Plus 32 offers you a fixed rate of interest on 40% of your deposit for one year, with returns from the remainder of your deposit linked to the performance over five years of selected indices.]
This article is for topical interest only and is not to be taken as investment advice.
*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 relevant Maturity Date.
This article is for topical interest and does not constitute an invitation to buy or the solicitation of an offer to sell securities or to accept deposits or to provide any other products or services in any jurisdiction, to any person to whom it is unlawful to make such an offer or solicitation, nor should it be construed to constitute any investment advice. Full terms and conditions linked to discussed products are detailed in the relevant brochure, along with the associated benefits and risks. Legislation or regulations in jurisdictions relevant to you may prohibit you from entering into certain transactions with us and we strongly recommend that you contact your financial or legal adviser in this regard. It is your responsibility for informing yourself about and complying with such restrictions.
Melville Douglas is a registered business name of the Investment Services Division of Standard Bank Jersey Limited which is regulated by the Jersey Financial Services Commission. Standard Bank Jersey Limited is registered in Jersey No. 12999 and is a wholly owned subsidiary of Standard Bank Offshore Group Limited whose registered office is Standard Bank House, 47-49 La Motte Street, St Helier, Jersey, JE2 4SZ. Tel +44 1534 881188, Fax +44 1534 881399,