Swing for an investor: how to make money in an unstable market

US Wall St.
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UNITED STATES (VOP TODAY NEWS) — The strategy of “buy and hold until you grow up”, which is familiar to many investors, may bring losses this year. It’s time to include in the portfolio tools that allow you to earn income during the fall of the indices.

The period of growth of world stock markets, observed over the past 10 years, seems to be coming to an end.

There are no prerequisites for a tight correction and no index drop, but there are no drivers for moving to new peaks either. Quotations fluctuate in a rather narrow range, plus or minus 3-5%, this is the classic situation of the flat market.

Investors who go into assets for a year and a half and choose a simple strategy (for example, stocks of pharmaceutical companies or securities from the technology sector) can go into the red. They now have only two ways.

The first is to expand the horizons and play for a while, that is, to invest funds for 3-5 years. But most Russian investors are not yet ready for this. The second way is to find the tools that would bring the projected income while guaranteeing the return of capital. What could it be?

– African history –

The current situation resembles the one that has developed on the stock market of the Republic of South Africa. From the late 1990s to 2008, investors in South Africa were getting used to the “buy and hold” strategy, which provided them with an average income of 13% in national currency.

The crisis of 2008 forced to abandon this scheme. At first, international investment banks began to offer classical structured products to customers in South Africa that made it possible to purchase securities of US and European companies.

The rates for such instruments (2-4% per annum) seemed to investors rather modest – after all, they were already accustomed to double-digit returns. They were interested: is there anything else?

And then financial institutions brought to the South African market products that imply high returns with a slight increase in assets.

Exactly the same thing is happening now in the Russian market. Investors who are wary of buying investment products that are oriented towards profitability with a rapid growth of the underlying asset and do not want to keep money only in deposits are asked to find an alternative to them.

Responding to a query, many companies quickly refined the product line, incorporating tools aimed at very specific indices that show good dynamics during the period of “stagnation” in the market.

So, at the end of last year, when it became clear that the market had gone into the “flat” zone, financial companies began selling instruments on the S & P Economic Cycle Factor Rotator Index (SPECFR6P).

His strategy is focused on an unstable market environment and adjusts to the current economic cycle, and this index includes securities with both market and interest risk. However, there are pitfalls. The fact is that the exclusive right to create derivative financial instruments for this index belongs to the bank JPMorgan Chase.

This enhances the operational risks of investors, including those related to the human factor, which may be especially noticeable with escalating sanctions rhetoric.

Recall that in 2014 many French companies reacted quite sharply to geopolitical events and left the Russian market. Customers who dealt with French financiers faced problems – banks stopped making new deals with counterparties from Russia, and for current instruments market participants noticed a significant decrease in liquidity.

It is unlikely that such a negative scenario will happen again, but this probability cannot be discounted. Therefore, despite the good performance of this index (on average it brings investors 7% per annum in dollars) and the popularity of the instrument (it became a record holder in sales in the first quarter), managers began to think about other options.

– Two approaches –

Most companies have adopted two strategies: either reproduce the idea of ​​the S & P Economic Cycle Factor Rotator Index, or use a strategy that assumes that income is generated even with a slight increase in the underlying asset.

An example of the first approach is the Solactive Global Real Estate 2-Factor Index , which allows you to invest in real estate funds and debt instruments. Real estate funds that are part of this index are reviewed quarterly, and the ratio of the shares of these funds and debt instruments is reviewed daily.

Real estate funds collected in the index, pay large dividends. This, in fact, forms the main increase in the value of the indicator, even during periods of turbulence in stock markets. Back-tests show that in the crisis year of 2008, this index would have decreased by only 2.1%, while the MSCI World indicator sank by 39.1% in euros.

At the same time, the average profitability from June 2006 to April 2019 for both indices would be comparable – 6.8% and 5% per annum in euros per year, respectively.

An example of the second approach is strategies for the index of European telecom companies STOXX Europe 600 Telecommunications. Investment companies have started to offer products based on this indicator quite recently, and we believe that investors will soon appreciate the index.

Now the telecommunications sector in Europe is a profitable alternative to the debt market. In many eurozone countries, negative rates are now in effect, which is why investors are transferring funds to highly visible sectors, including telecommunications, which makes it very stable in the long term.

That is, under the conditions of a falling wide market, this industry indicator is likely to show a positive trend or fall less.

This index allows you to create strategies for investors that can generate income if the benchmark is simply not below its initial level.

However, such tools have drawbacks. Their profitability is limited, and with the growth of the market, investors in classic instruments “for growth” can earn more.

However, everyone decides for himself what is more important for him: a stable low income or unlimited profitability, which cannot be foreseen in advance.

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