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#Investments — 29.03.2016

Why Invest in Structured Products on Equities and Indices

Nathalie Osphare-Druilhe

How to obtain attractive returns in a difficult economic and financial context.

Nowhere has been spared. Since the beginning of the year, the whole world has been experiencing major economic troubles that have been having a strong knock-on effect on the capital markets. Renewed fear about recession in the United States is limiting action by the Federal Reserve to interest rate hikes, whilst the Chinese economy has undergone some severe jolts. All of that is weighing greatly on oil and commodity prices, on international stock indices, equity markets, credit markets and on interest rates and forex. In such circumstances, structured products can be appropriate investment solutions.

 

Why choose structured products?

As we explained last month, structured products constitute an original and efficient alternative to traditional financial products:

1. They provide sophisticated solutions that can be adapted to the needs and constraints of every investor who has the appropriate knowledge and investment profile.

2. They can serve as a genuine palliative for a lack of return and a real source of yield differentiation. By combining factors specific to the client (strategy, risk/return, maturity and nominal) with an extremely wide range of underlyings – stocks, indices, commodities, forex, interest rates – they can provide tailored solutions. Their redemption mechanisms are almost endless, going beyond returns obtained simply through share dividends or bond coupons.

3. No matter what the market environment, structured products can also be a powerful tool for portfolio management and can enable investors to keep risk under control by providing diversification compared with other more traditional products.

4. Finally, because they are products that offer access to the markets without requiring investors to have direct holdings in the underlying assets, structured products can lessen the impacts of capital market turbulence.

Be aware that these investment solutions do, nonetheless, entail different risks that call for vigilance.

 

Why are equity markets and stock indices an appropriate place at the moment for seeking return in troubled market conditions?

In a context of extremely volatile and uncertain markets, equity markets and indices are currently giving rise to more attractive investment opportunities than those to be found with other asset classes.

From a technical viewpoint, the level of volatility on stock markets and indices is high enough to provide value in comparison with other markets, such as that of interest rates. At the same time, it remains acceptable with regard to keeping its side effects under control (in comparison with the commodity market) provided the underlying is well chosen.

From a fundamental viewpoint and despite market pessimism, fundamentals are still well oriented. So there are still buying opportunities to be seized on international stock markets, as explained by our investment strategy officers.

Even if the economic growth situation continues to be limited today, it is sufficient for us to form a positive opinion on equity markets and indices. Profit growth prospects and encouraging valuation levels should translate into higher stock market prices. This difference between pessimism and fundamentals therefore creates selective buying opportunities.

In these conditions, structured products on stocks and indices can comprise an attractive source of return. Opportunities must, however, be seized at the right time on underlyings chosen with great care.