As we try to make sense of rising equity markets against a background of global economies struggling to grow, it is nonetheless reassuring that the shockwaves from Brexit have not continued to bite. Sentiment was badly affected in June with £3.5bn of outflows recorded by the Investment Association.
The markets did suffer volatility but the UK stockmarket now seems to be on an upwards trajectory. After falling to a low of 5,982 in the wake of the referendum outcome, the FTSE 100 is back above 6,700 at the time of writing.
While the FTSE 250 has suffered because of its constituents’ greater UK focus, the FTSE 100 has risen following the Brexit referendum outcome. There has been reassurance over the avail-ability of support for the economy with the Bank of England’s cut to interest rates and larger-than-expected post-Brexit stimulus package.
The performance of some plans linked to a basket of specific FTSE 100 shares will not be as investors had hoped but the rewards offered from relying on the fortunes of specific companies of course come with greater risks.
Another way to generate extra premium from structured prod-uct investing is by choosing plans linked to more than one index. The quid pro quo is that performance is usually dictated by the worst-performing one.
Dual-index plans are based on the performance of indices that have shown some correlation. The most popular pairing of indices in the structured product market is the EuroStoxx 50 and the FTSE 100. The situation in Europe has caused divergence between these indices where once they had quite close corre-lation. Given the strong performance of the FTSE 100, most of the adviser-distributed market of plans that are solely linked to this index will benefit from this.
An example of a product where, six months ago, few people expected the plan to mature – let alone post the Brexit outcome – is the Walker Crips Ann-ual Growth Plan Issue 22. This auto-call looked unlikely to reach its maturity cri-teria this year, requiring the market to be above its start level of 6,589 on 12 September. If in fact these criteria are met, the plan will deliver a 15 per cent gain over two years.
Many structured products do not require much market growth for positive gains, while defensive plans could be considered by more cautious investors because such products can deliver positive returns even in slightly falling markets. An example of a defensive auto-call is a product offering a 7.75 per cent gain for each year held, payable on any anniversary from year three onwards, provided the FTSE 100 Index closes above 90 per cent of its start level.
If markets continue on their rising trajectory, more auto-calls will mature early and growth products, particularly if they make geared returns on rising markets, will benefit and deliver attractive returns.
The post-Brexit FTSE rise means the entry points for new plans into the FTSE 100 may not be as attractive as when the market was lower but, while market buoyancy is positive news, there is still likely to be more volatility.
The challenges facing Japan and China, the UK’s pending exit from the EU and the upcoming US presidential election remind us that, while plain sailing is good news, there will always be weakness in the market that can bring opportunities.