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Investing at high altitude

As central banks around the globe embarked on aggressive rate hikes, few could have anticipated the equity markets' remarkable journey to unprecedented heights over the following two years. The sensitivity of the so-called "Magnificent 7" to interest rates made the S&P 500's breakthrough past the 5000 mark even more unforeseen.

Investment bank strategists, regarded by investors as the foremost experts in market forecasts, with vast experience and unmatched resources, were unable to anticipate the meteoric rise of the S&P 500.

At the outset of 2023, Morgan Stanley, Barclays, UBS, and Citi predicted the S&P would close the year at 3900, 3725, 3900 and 4000 respectively. It finished at 4770. Among the year's standout surprises was the revitalisation of the Japanese stock market. The Nikkei 225 which broke through 38,900 this year, a zenith last witnessed in 1989 when the Japanese market constituted 44% of the MSCI World Index. 1 At this point in time, the S&P 500 was 353, FTSE 100 was 2,423, Gold was $389 and WTI Crude was $21.82.


For equity investors, these record-breaking levels bring both excitement and a hint of vertigo. The adage that what goes up must come down looms large, yet historically, new highs often pave the way for further peaks. This trend, coupled with the human propensity for 'herd mentality' and an estimated $6 trillion in side-lined cash, suggests the potential for continued market elevation. 2 The fear of missing out (FOMO) plays a significant role in this dynamic and is why market crashes are so often preceded by a ‘melt up’ phase.


However, investors' hesitance is not without merit, given the current landscape. With inflation refusing to go away, uncertainty of central bank rate cuts, Israel/Palestine and Ukraine/Russia conflicts raging on and around half the world’s population going to polling stations, it has the potential for a volatile year.

Perhaps investors can take some comfort that every time since 1944 that a US president was running for re-election, the S&P posted gains for the year, regardless of whether the incumbent won or not. The average one year returns for those years from US equities was 16%. 3 Although it has been a long time since the US has had such polarising characters running for office.


All this leaves investors with a rather difficult dilemma. On the one hand, investor sentiment does appear to be improving and given their track record of not wanting to be left behind, markets could ascend higher up the mountain. Although on the other hand, any geopolitical surprises or central bank missteps could cause the markets to lose their footing and tumble back down.


For investors questioning their current allocation to equities or those contemplating taking that ‘leap of faith’ to buy more at these levels, at Atlantic House we believe our Defined Returns Fund could provide a viable solution. 


The fund aims to deliver an annualised net return of 7% -8% over the medium to long term, under almost all market conditions except the most severe downturns. It does this through a diversified portfolio of autocallable instruments linked to global equity indices. A typical autocallable is structured to generate a positive return unless the equity markets decline by more than 25% over a six-year span. Additionally, the capital invested in these instruments is shielded from losses unless the market falls by more than 35% during the same period. Consequently, the fund aims to provide equity-like returns even in stagnant or mildly declining markets, thanks to its built-in downside protection.


Due to the inbuilt defensive barriers, autocalls have the potential to get investors back into positive territory post a large market fall relative to an investment in equities. For instance, consider an investor who buys an autocall on 31 October 2007, the peak of markets right before the global financial crisis – featuring an 8% annual coupon and 6 year life. Over the following 15 months, global equity markets plummet by 57%. Each year, the autocall has a predetermined observation level, marked by a "red line" on a chart. If the market is above this level at the year's end, the autocall redeems early, returning the accrued coupon and the principal to the investor. If the market is below this level, the autocall rolls over to the next year. Typically, the observation levels decrease annually, enhancing the likelihood of early redemption as time progresses.

In this scenario, the autocall redeems in its fifth year (October 2012), when the market recovers to 80% of its original level. The investor receives their initial capital plus five years of 8% coupons, totalling a 40% return. Conversely, an investor who bought equities at the market's peak before the GFC would have seen a total return of -10.4% over the same period. It would have taken these equity investors an additional 18 months just to break even and until February 2017—a full five years after the autocall delivered its 40% return—to achieve similar gain.

Solactive GBS DM Large & Mid Cap TR USD

Source: Solactive GBS DM Large & Mid Cap TR USD, 30/10/07 - 02/01/17

The Defined Returns Fund is well placed to navigate a wide range of market scenarios. If this is actually the peak of the mountain then the fund offers downside protection and potential for a faster recovery back to flat versus a traditional equity investment. If this isn't the peak and we have a further melt up to come, the fund will still participate but will lag against equity rallies of more than 9% a year.

We are aware that some investor’s underlying clients have a tendency to panic in a market sell off and liquidate their equity positions at market lows and potentially cause long term permanent loss of capital.

We hope the fund’s defensive attributes might help to mitigate and dampen that impulsive reaction. Finally, for those underlying clients who are hesitant to commit cash at these levels and are waiting for a ‘pull back’, perhaps the fund can help them get comfortable investing in equities at this altitude.



This is a marketing communication prepared for professional investors only. Past performance does not predict future performance. Capital at risk. The Atlantic House Defined Returns Fund aims to achieve 7%-8% net over the medium to long term.


Source 2: Yahoo Finance, Record 6 trillion cash sidelines

Source 3: Morgan Stanley, Global Equity Market Outlook 2024


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