Investment certificates are instruments that allow you to invest in a specific underlying (share, index, etc.) and which usually present the possibility of collecting a certain coupon flow and having a protection "barrier" in the event of a negative event. (particularly important drops in the case of long certificates for example).
I don't want to get too technical, in any case volatility is one of the factors that affects (inversely) the price of a certificate, therefore (let's take for example a long certificate, so that it earns if the underlying rises) under the same conditions, if the volatility goes up, the effect on my certificate will be negative and vice versa.
Looking at the graph below, which expresses the volatility on the European market, we notice the peak of volatility (not seen since the Covid period) that we are witnessing due to the Russia - Ukraine conflict. Many certificates have therefore decreased in value, also due to the decline in the underlying assets themselves.
Therefore, with these factors in mind, it might be a good time, with due caution, to start considering the inclusion of this type of product within a well-diversified portfolio.
In addition to the propitious moment on the volatility and underlyings side, the effect could also be positive in tax terms, since any coupons on the certificate are miscellaneous income, so I could offset them against some losses I may have in my portfolio on certain securities.
Europe, how are we doing?
Below I have reported the chart of the main European index (Euro Stoxx 50) which we see returning to precovid levels, with a bearish head and shoulders that appears to be on the final straight.
I remember that Europe, which had suffered more than the United States since the beginning of the year, is paying a pledge following the Russia-Ukraine conflict, therefore in the space of a couple of weeks the prices have dropped a lot, and today we find ourselves with several indices below 10-15% from the beginning of the year.
Among the sectors most affected then, we have the banking sector, since the series of sanctions and blockades between countries are penalising the activity (especially of those that have, albeit minimal, exposure in Russia) of the main credit institutions.
Thus, in general, the sector in Europe is perhaps paying even more than it should (see graph below).
Therefore, a certificate could be a possible option for those wishing to aim for a rebound in the sector (remember that we are in a context of the start of restrictive monetary policy, with generalised interest rate rises that have taken place or will take place shortly).
How to choose the right certificate
We have said above the main characteristics, in principle, however, I will have to choose (if I aim at the coupons and at a more cautious strategy) an underlying that perhaps has already lost a lot, that is found graphically close to important supports (from which it could for example bounce), with deep barriers (possibly discreet, that is that they are valid only at expiration and not during the life of the certificate) and with expirations not too distant in the time (2-3 years maximum).
At the level of underlyings, an index will certainly be more prudent than a single share, and any reduction in volatility will have a positive impact on my certificate.
Regarding the yield, structures similar to those described above, today can lead to coupon yields of around 4-5% per annum, to which an extra-yield can be added due to the price that is below par (usually the cuts are from 100 or 1000 Euro per piece).
Until next time!
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"This article has been written for informational purposes only; it does not constitute solicitation, offer, advice, consultancy or investment recommendation as such does not want to incentivize the purchase of assets in any way. Remember that any type of assets is valued from multiple points of view and is highly risky and therefore, every investment decision and related risk remain with you"