What to watch out for when investing

The outlook for global markets suggests that 2018 will be a challenging and volatile environment for which sound decisions are required. The combination of market volatility, interest rate concerns and inflation expectations are key decision catalysts to be considered when investing.

Different volatility, different ways to invest

In a low volatility environment, passive investment strategies are acceptable. Now, in a more challenging environment, many investors can find it is time to go active while taking good advantage of market’s ups and downs.

The long bull market together with low volatility which has existed for several years reflects rising expectations for businesses, consolidating robust investment expectations. It seems we have ahead of us a volatile outlook. In this context, most conservative investors’ insights would be aiming to find potential for long-term success while lowering their return expectations in the short term.

Structured products in volatile environments

One advantage that structured products provide is the customized features that are built in. This provides an increased likelihood in achieving investor’s objectives if their view of the market is sound.

It is not a surprise, given the current volatile environment, the increasing popularity of autocallables within investors’ profile preferences. If underlying shows reasonable performance, the product will be more likely to be called. Most auto-calls tend to make an early call the most likely.

Reverse convertibles with high coupons take greater risk because in volatile environments the chance of capital loss increases. At low volatility levels, there would be less risk associated to the product and therefore the coupon amount would not be so compelling.

High volatility environments can provide high exposure on both the upside and downside. Therefore, it is important to assess the investor’s profile to understand what is more valuable the upside or the downside. Features like the buffer, strengthen protection in the product. In volatile markets, aggressive investors would find that a cap in returns is a constraint. On the other hand, a conservative investor would find the buffer feature worth paying for.

There is an array of structured products from which to choose depending on investors’ objectives, financial situation, market evolution and risk appetite. It is highly important to make considerations about the volatility of the underlying value of the product, because this somewhat determines the type of product each profile investor should be aiming at.


Structured product research

Structured Edge from FVC is the leading research service on structured products for financial advisers. This service has covered over 5000 products in the UK over twenty years and we introduced an offshore structured product research service in 2018

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