The sentiment switch

This blog was published on 22/05/18 and does not constitute advice, nor should it be seen as a personal recommendation from Societe Generale.  Information quoted within may be out of date at the time of your reading this blog.

Prior to the volatility spikes we saw earlier this year, investors were probably convinced that cheap liquidity supplied to the market by central banks to rebuild the financial system after the credit crisis would be available for the foreseeable future.

After all, behaviour modelling suggests that market trends persist for much longer than you might expect. Long positions in Leveraged Exchange Traded Products (ETP’s) have been popular, due to low returns from competing assets, for five years.

At the start of February, however, the markets decided an unexpected hike in US wages could trigger higher inflation and interest rates. The markets ceased to trust in the continued growth of share prices. Volatility soared and some markets crashed, with further spikes in late March early April. Trading periods are set to fall and Short ETP strategies are being used as hedging tools to protect the value of portfolios. 

Designed to be traded intra-day, Leveraged ETP’s are used by day traders and sophisticated investors who focus on the daily performance of an asset. You can invest in long-only ETP’s which produce returns as underlying assets rise, or Short ETP’s which go up, when assets fall.

Leveraged ETP’s offer exposures to assets such as equity indices, commodities and currencies, multiplying underlying gains or losses two, three or even five times.

For example a 50-basis point daily rise in the index, for a three-times Leveraged ETP would generate a 1.5% gain, while a 50-basis point drop would mean a 1.5% loss. And vice versa for Short Leveraged.

They incorporate an “airbag” safety feature, which temporarily halts trading if an ETP loses, say, 45% to 75% of its value following a savage market change, and unlike some other leveraged products – such as contracts for difference and spread betting – it is impossible to lose more than the sum you invest. You only need to remember that if your ETP falls in value during a day, you have less to reinvest in the next trading period.  Compounding these shortfalls can undermine, or boost, returns from products held on an inter-day basis.

The next trend may not become established for a while. In the interim, risk on/risk off could be the dominant trade and long and short ETPs could each have their uses, at different points. 

Societe Generale’s launch of a new suite of Leveraged ETPs sets out to offer highly competitive fees, and spreads as investors seek to deal with uncertainty.  You don’t need behaviour modelling or hedging studies to see advantages in low costs. 

Remember, as with most investments, the value can go down as well as up, and as a leveraged investment these products are designed for sophisticated investors, so if in doubt, seek advice.

Post by: Zak de Mariveles, Head of UK Exchange Traded Products

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Risk Warning: Short & Long Leveraged ETPs are suitable for sophisticated retail investors. Both gains and losses will be accelerated in comparison to a direct investment in the underlying asset.
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