MARKET ANALYSIS
Capital protection: back with a bang Across all major currencies there has been a sharp increase in interest rates in 2022. This has mostly been caused by inflationary pressures leading to central banks raising rates as their main weapon to control price increases and the associated risks of economic recession. by Tim Mortimer - FVC
Image: Adobe Stock/jirsak 28 9
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he USA is the world’s biggest economy and stock market and it too has seen changes typical of the current global situation. In the US inflation (as measured by the consumer price index or CPI) has jumped from 6.8% to 8.5% in the first eight months of the year. This has caused the five-year zero coupon interest rate to rise from 1.36% to 3.45% as a result of Federal Reserve action and sentiment. This five-year rate is the best point on the yield curve to see the likely effect on pricing of structured products because it is around the average maturity of capital protected products. For many investors, the return of attractive fully capital protected solutions is a welcome after many years of absence of such choices The different investor groups that are active in investing share many basic concerns and goals. Two of these are preserving
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capital where possible and providing for a high level of sustainable income. In recent years it has been extremely difficult to combine these two goals. Low interest rates mean that the income that can be generated while maintaining capital security is very low by definition. This was not easily improved by moving to corporate bonds or lower volatility managed funds and ETFs. While equity markets have had some good years, their properties are fundamentally different and direct equity investing will not be a viable route for most lower risk investors. Structured products filled that gap through products such as income autocalls which do a good job of providing income if certain conditions are met, generally the associated underlyings having stable enough performance above any barrier level to deliver income and repay capital at maturity. In order to consider what terms could be offered for a five-year
