On 5 November Americans will elect their president. It looks as if there will be a repeat of the 2020 duel: Biden vs. Trump. Although the latter candidate is mired in numerous court cases, Republicans seem to want to put him back in the race. One way or another, the United States is in for a few turbulent months in domestic politics. Until then Wall Street will not let either that prospect or high interest rates or stubborn inflation put it off course. The S&P 500 index has gained just under 5% in value since the turn of the year. One of the drivers, alongside hopes for an imminent loosening of monetary policy, is the latest reporting season. By the middle of February more than three quarters of groups from the S&P 500 had presented their results. For the 4th quarter of 2023, according to J.P. Morgan, they reported average earnings growth of 5%. That puts the results 8 percentage points higher than the markets had expected.
This surprise can be attributed solely to the “Magnificent 7”, a group comprising Apple, Microsoft, Alphabet, Amazon.com, Nvidia, Meta Platforms and Tesla. If their results were ignored, the cumulative profit in the leading US index would have shrunk by 4% at the end of 2023. These tech, communications and e-commerce giants now account for almost 30% of the capitalisation of the S&P 500. They are thus driving valuations upwards alongside the overall performance. In addition to election campaigns, inflation and high interest rates, then, Wall Street is also feeling the impact of clustering. In view of the imponderables associated with such an uncertain picture, the time may have come to consider an alternative positioning.
This is where a new capital protection certificate with a conditional coupon comes in. The structured product is based on a long/short strategy. While it bets on falling prices for the S&P 500, it also brings rising prices for gold into the calculation. Although both USD yields and the dollar itself have recently been trending upwards, the troy ounce is hovering around the USD 2,000 mark. Alongside the prospect for a turnaround in interest rates, one of the reasons for its relative strength is the tight monetary policy. The gap between the US benchmark index and gold does not have to widen too far for the conditional coupon to become payable. For gold, a distribution requires the price to rise by 5% or more during the one-year term. For the S&P 500, the condition is a decline of at least 5%. If the long/short approach pays off, investors receive the coupon of 15%. This repayment profile is made possible by what is known as a dual digital warrant.
Even if the strategy on gold and US equities fails and the option becomes worthless, investors will not go away empty-handed. The capital protection amounts to 101%. Thanks to the minimum repayment, the yield in the event of success climbs to 16%. Please note that the conditions set out here do not kick in until the maturity date. During the term the value of the structured product can fall below the guarantee level. In addition to the performance of the two underlyings, the further development of USD yields in particular will also have an impact on pricing in the secondary market. By the way, the capital protection certificate chimes well with J.P. Morgan’s assessment of the market. The renowned research department of the US bank sees the price of gold reaching USD 2,175 at the end of the year. J.P. Morgan is reckoning on a correction on Wall Street, though. The analysts put their target for the S&P 500 in December 2024 at 4,200 points. That would mean the index finishing almost a fifth below its current level.
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