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Saving and Investing 14 November 2022

Structured Products help counter market volatility

The first half of 2022 was a rather rude awakening for investors who had become accustomed to more than a decade of ever-rising stock market prices. Even the pandemic-driven 30% fall in global markets in March 2020 wasn’t enough to dampen investor appetite once prices staged a miraculous recovery over the next six months.

In sharp contrast to this V-shaped recovery, market volatility in 2022 and fears stoked by rising inflation have led to a bear market in which prices have been squeezed.
 
Up to the end of June, major market indices were down considerably from the beginning of the year. The tech-heavy Nasdaq had lost the most value, down 30% over this period, followed by the S&P500 index (-21%) and Dow Jones Industrial Average (-16%).
 
Collapses of this magnitude are not new (think back to the global financial crisis of 2008/9 and the tech bubble of the late 1990s), but for many investors this latest dip is completely foreign territory.
 
It’s only natural then that they feel spooked and uncertain about the immediate future and the value of their portfolios.

 

Fear and loathing of market volatility

The most important take-away from the latest market volatility is the timely reminder that markets tend to rise and fall over the short term.
 
Investors unaccustomed to this extreme volatility may feel that now is not the time to be exposed to such uncertainty. However, the greatest risk they may face is moving their investments from equity markets into safe havens such as cash.
 
Doing so may offer peace of mind, but there is the possibility that returns won’t keep pace with inflation and therefore reduce your buying power.
 
Short-term fluctuations in valuations, however, are likely to cause risk-averse investors some discomfort.

Cash is not always king

When investors do get excessively nervous with the state of the market they often take flight to less volatile assets, like cash. While this may seem like a reasonable response to protect your assets, this strategy is not without risk.
 
That risk is heightened in an environment of high inflation because interest rates offered might not keep pace with inflation, thereby reducing your buying power.
 
You also face the added risk of missing out when markets do correct and start climbing again. Calling the bottom of the market is notoriously difficult because no-one has sufficient foresight to accurately and consistently make that call. And in the absence of such certainty, investors are likely to miss out on the growth that follows market dips.
 
The best long-term strategy, then, is to ride out the lows and profit from prices appreciating when market sentiment does turn positive.

 

 

Reduce your risk

One downside to this approach is that you have to accept volatility and uncertainty in market prices.
 
Unless, of course, you’re prepared to place your funds into a long-term fixed deposit that has the potential to outpace inflation.
 
Our Structured Products offer this type of benefit by promising capital protection* if you hold your deposit to maturity.These have defined start and end dates, with returns usually linked to the performance of specific market indices.
 
A typical example of how this works is a Structured Product that tracks the performance of selected S&P low-volatility indices over five years. The particular market you track depends on the currency of your deposit. At the end of the period, you will receive back your deposit plus a fixed percentage of positive growth the index has achieved.
 
Another type of Structured Product is a four-year deposit tracking the performance of selected S&P indices. In this case, you will receive at least your original deposit, plus a defined return if the market return is positive and a minimum return if market performance is neutral or negative.
 
That level of certainty is enormously comforting at a time that short-term market returns are extremely unpredictable.
 
For more information about these products and opportunities they present, please see details on our Structured Products page.
 
*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.