Saving and investment products for volatile markets

Rafael Hurtado. Professor. IE Business School

11 September 2008

In times of uncertainty, investors are cautious and demand products that offer high levels of security. The banking sector has not been slow to roll out a broad range of such products to choose from.

For some months now we have been witnessing instability in most financial assets (variable income, fixed income with credit risk, fixed income with high maturity, etc.). This situation has made many minority and institutional investors more aware of risk and led them to invest their money in high-security products. Accordingly, the banks have adapted flexibly and quickly to the new market scenario, offering low-risk products. At present, retail banking has great demand for bank deposits, monetary funds and short-term fixed-income funds without credit risk. Owing to the increase in interest rates, both options offer profitability levels that are slightly higher than a few years ago. Furthermore, in investment funds, clients have the benefit of not paying taxes until they withdraw all or part of their investment.

In retail banking, guaranteed funds are products marketed actively by most banks. The underlying assets on which said funds are constituted vary greatly and are often variable-income assets, since many investors look for exposure to indexes or shares with limited risk thanks to attractive stock market prices.

In the case of private banking, the products that are offered actively are similar to those offered by retail banking. Besides deposits, monetary funds, short-term fixed-income funds without credit risk and guaranteed funds, some banks are also very active in the marketing of various structures (bonds, deposits, etc.) with guaranteed capital and a highly diversified selection of underlying assets that range from raw materials to hedge funds.

The more institutional investment segment (such as pension schemes and insurance companies) has also been affected by the current scenario of volatility. Many large investors have decided to limit their exposure to variable income and are analysing the possibility of increasing their exposure to assets that are not closely linked with traditional shares and bonds markets, albeit with a high-level capacity for generating acceptable earnings, such as hedge funds and assets linked to raw materials. Furthermore, given the corrections in some variable-income sectors and fixed-income securities, certain investors are beginning to study their participation in funds that focus on buying undervalued assets: the so-called distressed securities.

The current context poses challenges for small and large investors alike and it is logical that many have decided to protect their portfolios by investing in limited-risk assets. However, the current volatility has also generated great opportunities for mid and long-term investors.

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