THE LAST couple of years have been a rollercoaster for investors, and while 2010 is not shaping up to be quite so unpredictable, there are certainly some bumps in the road ahead. It’s just the sort of environment where covered warrants come into their own. For one thing the most you can lose is your initial premium. Secondly, they don’t require margin payments and they can be just the tool for investors who want to protect their capital. Below we take a look at some of the major predictions for the year ahead, and the covered warrants that you could use to trade them.
PREDICTION: Sterling to get weaker
Most people think that there will be more downside for sterling in the first half of this year. The question is when the Bank of England will raise interest rates. With quantitative easing due to end in February and no confirmation the bank will suspend its stimulus measures, Duncan Higgins, senior analyst at Caxton FX, says that investors will be hesitant about taking long positions in sterling. If you think the UK’s economy is too weak for the Bank to raise interest rates in the next six months then a long put position on sterling versus the US dollar could suit your view.
Trade: RBS offers sterling versus US dollar puts with a strike price of $1.50 and an expiry date of 18 June 2008. Alternatively Societe Generale offers a put with a strike price of $1.30, which also expires on 18 June.
PREDICTION: FTSE TO THRIVE
Ben Board from RBS is bullish on European equities for the coming year, especially the FTSE. “Mining companies and banks have been good performers since the end of last year and this is set to continue,” he says. This is good news for the FTSE, which contains a number of both. Many British-listed companies are international, and so are not reliant on the UK economy for profits. Because most commodities are denominated in US dollars, a weak pound also benefits them. Trade: Societe Generale is offering a call warrant on the FTSE 100, expiring in June with a strike price of 5,300. RBS also offers
a FTSE 100 call with a strike price of 5,500 and an expiry date of 16 June.
PREDICTION: Emerging markets to skyrocket
Stocks in emerging markets made stellar gains in 2009 and there is scope for more, says Ben Board: “There’s real prosperity in China right now, although it’s not widespread it’s getting there and the economy will continue to grow in 2010.”
Trade: RBS offers a warrant on the Hang Seng HSCEI index, which lists ex-state owned Chinese companies, with a strike price of 15,000 (current price is more than 13,000), which expires on 16 December. Brazil’s Bovespa index also performed strongly in 2009, however a tax has been levied on all foreign capital flows into the stock market, which makes it a less attractive investment.
PREDICTION: Commodities to strengthen on the back of emerging market recovery
Commodity markets are back in focus as the world emerges from recession. Look out for the Rogers International Commodity Index (RICI), which
gives investors a broad-based exposure to commodities including crude oil and corn as well as to products like palm oil and lean hogs. Rogers, who is based in the Far East, created the index with emerging markets in mind and included commodities popular in Asia. It should do well if emerging markets continue their growth this year. Trade: RBS offers a call warrant on the RICI index with an expiry date of December and a strike price of 4,000.
PREDICTION: Gold to gain, but slowly
Gold benefits from safe haven flows and last year it showed it can shine on its own without the help of a global financial crisis. However, after topping $1,200 an ounce in the latter part of 2009, there are doubts as to how spectacular its performance will be this year. Since a further rise for the gold price may take some time, a long dated covered warrant could be a good investment.
Trade: Societe Generale has a call warrant for gold that expires on 17 September and has a strike price of $1,300. RBS also offers a call warrant with a strike price of $1,500, which expires on 17 December.