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Investec USD SandP500 Digital Plus

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Morning All, What is the forums views on the Investec USD S&P500 Digital Plus offering. My concerns are that the rand may appreciate in the 3.5 years to maturity date resulting in diminished returns. Also does anyone feel that the S&P500 may fall by 30% resulting in an investor loosing the down side risk protection. Any comments would be appreciated. Many Thanks.
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16 REPLIES 16
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what makes you think the Rand may appreciate?
Im not taking any sides, Im just curious
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Hi BC01. Was thinking along the lines of Ramaphosa being pro-business, and if he is the next President as this instrument is for 3.5 years, I cant see him being any worse than the current President. Am more concerned about the statement in the detail brochure that reads " However, if the Final Index Level is less than or equal to the initial Index and the Index has been below 70% of the Initial Index Level, (i.e. has fallen more than 30% during the term) the protection falls away and the investor will have full exposure to the downside; for example, if the Final Index Level is down 22% at maturity, having been down 31%, then the investor will incur a loss of 22%."
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Frequent Contributor
theres a lot of ifs in there, especially with Zuma resigning.
The reverse side of it as well is that your betting that a dollar poor country will strengthen when the only thing they sell is commodities and thats in a slump.
You are also going against stimulus from 3 major economies in the world in the worlds biggest currency war, thats driving the R/$ to weaken further.
Not picking sides, just saying theres 2 sides to the coin, and the trend could still be your friend.

...of course (this is why economics is so fun)...because the R/$ is so weak everyone believes buying SA is cheap which could strengthen it again...
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Frequent Contributor
regarding the second part, have you considered waiting for downside first before investing something like that?
Personally Im not a fan of that instrument at this point in time.
Standard bank though has 1 that has 100% protection which is better, but you give up some of the returns - you get 70% of the return.
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Contributor
which instrument is that (Std Bank)?
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Frequent Contributor
Quantum Plus 17
https://international.standardbank.com/personal/structured-products/quantum-plus-17-deposit

Pros/Cons:
Your money is locked for 5 years.
You only get 70% of market growth.
You get 100% money back guarantee.
They average into the market, its not a "all in at the start".
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personally I think it is not a good investment. I don't see the benefit of collared investments tracking an index like this. The downside protection is all dollar based, which is useless, IMO. You have a far bigger risk of rand appreciation than an index pulling back by 30% right on the date of maturity (if the index is going to do it, it is more likely to be now). Best course of action, if you are going to invest in index tracking funds, is to cost average. Don't put all your eggs in the index now, rather buy periodically on dips. Index investing is for long term, and the dividends are also important.
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Frequent Contributor
why is the protection useless? Sorry Im not following.
Worst case you get 100% back.
If you buy stocks directly, worst case you could lose 50%

Im not trying to punt this product (I didnt end up investing in this), just trying to understand your comment.
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sure - the issue here is basic risk vs reward. Risk free rate is say 9.25% government bond - so 30% per annum. So this policy, anything between 0-25% growth has you losing money. Anything less than 0% has you breaking even, but actually you losing money. If the index drops 30% or more - well all bets are off since your hedge falls away. So basically the only way to make money is for the index to rise more than 30% in 3yrs - all other hedges are loss making for you. So now the question is, how big a loss are we talking about. Well, what is the worst case scenario? > than 30% - well, you aren't protected by that anyways. Between 0-30% loss over 3yrs? Well, I would argue that a 29% loss on an index tracking investment over a 3yr period on and index is only possible if we enter a) a secular bear market or b) a financial crash from which we fail to recover. In option a) well that is a possibility - but option b) your hedge will in any case be lost. So the only scenario you are actually protecting yourself from? its the flat lining market over 3yrs - so ask yourself what the risk of this actually is?
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Super Contributor
@Bchip, protect yourself, go short MTA and long your Index.
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Frequent Contributor
I agree with you if start including risk free rates its another story. You can complicate it even more to say but you need to include the inflation of US as well.
And also include that 40% gets a 2% return guaranteed, so you get 2% in dollar terms...so if theres FX gains you need to include that as well.

Theres a lot of ifs with these structures, you need to be able to predict the stock markets, the forex gains, the risk free rate here.
Im not going for this though, but if the markets were in a crash I cant see why not use these "geared products with protection.

If USA fell 50% could be great to get some market returns from then, limited risk (as its already fallen 50%) and get the Forex gains on the R/$.
Then again if the markets fell 50% maybe you have a point of just take the risk and enter the markets yourself?
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I think you might be missing my point. I am not against investing in the S&P - that is a great investment - I am against the hedging offered by this structure. The hedging is useless, because it only protects you in a flat 0% growth over 3 years market. But I would argue why would you need such protection - since a bond will offer better investment.
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Frequent Contributor
think I see what your seeing,
Investec product:
massive downside = no protection
massive upside = you lose out on returns
sideways/flat market = bond wouldve been better


Thats where the SBK product differs
massive downside = 1% return in $
sideways/flat = 1% return
upside = less returns than investec.

Considering though bonds cost a lot of capital,
whereas hedging uses options and less capital
I wonder what a good structure is for an uncertain outcome.
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Super Contributor
@Bchip. I think you might be missing my point. If you went short MTA, you would have been in the money now.
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Frequent Contributor
:D

Thanks, dont trade shares though. Only futures, forex and commodities.
But well done, lets those profits ride! XD
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personally, I subscribe to the Warren Buffet school of thought - never lose money and invest for long term - this mechanism doesn't fit the criteria (you could lose money and it isn't long term). And therein lies another point. 3.5 yrs into the future is an arbitrary timeframe, so why concern yourself with that specific date in time. Surely if you believe in the S&P then let it ride as long as needed. If you have specific needs for the proceeds at that time, then you want the risk free option, IMO.
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