Structured products have many advantages. One of them is that they allow investment in an almost unlimited range of underlying stocks, another that the risk management spectrum extends from “high risk” all the way to “zero risk”. The latter is also called capital protection and is now possible again after a long period of abstinence. The reason? Rising interest rates. If an issuer is to be able to offer a 100% guarantee, after all, the bonds need to achieve a positive return. In an age of galloping inflation and the associated increases in base rates, returns have now climbed sharply again. Whereas, for instance, the yield on the ten-year Swiss government bond has been back in positive territory since the turn of the year after a long drought and currently stands at 0.82%, the 10Y US Treasury Note is already returning 2.94%. If we now combine inflation as an investment goal with capital protection as a product structure, the result is an extremely attractive investment.
Leonteq is once again proving to be something of an innovator, launching a 100% capital protection certificate on the US Consumer Price Index Urban Consumers NSA. Not only is the nominal of USD 1,000 fully protected at the end of the three-year term, the product also participates 100% in any rise in the consumer price index. The underlying reflects the average change in prices that urban consumers are paying for a fixed basket of goods and services, such as food, clothing, accommodation, fuel, medicines and transport costs. The index also includes the taxes associated directly with the purchase and consumption of articles. That devaluation is gathering pace is demonstrated by the most recent inflation data: in March the US consumer price index climbed 1.2% on the previous month to reach 287.50, putting it as much as 8.5% higher than the previous year. The upward trend is continuing, then. Since December 2020 the barometer has been rising steadily month on month, appreciating by a good tenth over this period. Taking a three-year view, the increase is as great as 13%.
The most recent statements by the Fed that it is contemplating raising interest rates more quickly than thought due to huge price increases reveal that inflation is still probably a long way from peaking. The reasons for a further increase in the cost of living lie predominantly in factors such as supply bottlenecks and rising prices for energy and raw materials. The war in Ukraine is a key driver here, and causing prices to explode across the world. This is in turn leading to measures such as those taken recently in Indonesia, the world's largest supplier of palm oil, which is stopping exports in order to support its domestic population. As the raw material is contained in many foodstuffs such as such as spreads containing cocoa, pizzas and other ready-made products, and even in cosmetics, further price increases are to be expected for many goods.
The new capital protection certificate allows investors to counteract the general devaluation. With a strike at 2.5%, for instance, if the rate of inflation is 4% the product will deliver a return of 4.8% when the term ends on 25.04.2025. If inflation is taken into account, the theoretical gain over cash would then be more than 8%. Should inflation remain at its current level, the certificate will even generate a profit of over 18% at the end of the term. The product cannot slip into negative territory at maturity; the 100% capital guarantee ensures that at least the nominal value is repaid in three years.
We look forward to answering all of your questions about our products and how they are traded. Please don't hesitate to get in touch! Phone: 058 800 11 11, email info@leonteq.com or contact us here.