Extremely negative and volatile start of the year in the financial markets brought to the surface many concerns about the state of the world economy and global stock market. The speed and extent of the price drop in the markets, which caused many indices to enter official bear market (more than 20% decline from 2015 highs), raised fears that a new recession and crisis is looming. However, the reason for these expectations is mainly psychological, as investors still remember the year 2008 very well and many believe that all bigger market declines are coinciding with recessions. Such fallacy is called recency bias,” explain Nordea Savings experts in Baltic countries.
“History on the other hand has many examples when double digit market declines occurred without any recessions. Moreover, looking at the US equity market data since the year 1928, 64% of all years experienced double digit declines sometime during the year. Additionally, big decline during the year does not mean that full year return will be negative as 57% of the years with 10% drawdowns finished the year positively,” says Anželika Dobrovoļska, Team leader of investment products development department in Latvia.
“Looking at the economic data, also no signs of recession can be found – global economy is still expected to grow above 3% annually, financial institutions have strong balance sheets, the inflation is low and no such catalyst as subprime was in 2008 is present currently. Still, as we are at a late stage of the business cycle, nervousness and volatility in the markets is to be expected.
Such market situation is ideal for investment in structured products with principal protection. Capital guarantee means that investor’s maximum risk is known in advance and is limited to the premium paid. As a result, investor can perfectly match the preferred risk tolerance and easily weather potential market turmoil. Additionally, the semi-annual averaging of the final price of the reference asset provides the benefit of diversification in time, as the final investment performance will not depend on the price level at just one specific point in time.
Starting this week, Nordea starts selling two structured bonds, which may be well suited to a diversified portfolio in the current market environment.
The first bond is connected to the performance of a basket of 10 US consumer goods companies, with both staples and discretionary sectors represented. There are several positive tailwinds for U.S. consumers as we approach 2016: low gasoline prices, improving residential housing conditions, falling unemployment, low inflation, and low interest rates. Moreover, the presence of consumer discretionary sector in the basket ensures that in case of stronger economic growth investors would benefit, as consumers have more money to buy such items. At the same time consumer staples should provide stability in turbulent times.
The second bond is linked to a basket of 10 well-known big Scandinavian company shares. The Nordic region should benefit from the strength of the Swedish economy with additional stimulus from the ECB and local central banks. Also, potential stabilization of oil prices will also strongly benefit Norwegian equities, which were under pressure for the last year and a half,” says expert.
*This publication has been prepared Nordea Baltic Savings unit. The publication is intended only to provide general and preliminary information to investors and shall not be construed as the basis for any investment decision.