GEAR UP YOUR EXPOSURE TO RECOVERY
HEAD OF LISTED PRODUCTS UK, SG CORPORATE & INVESTMENT BANKING
a LAST year there were hopes that emerging markets, particularly in East Asia, had decoupled from the crisis that was plaguing the most developed economies in the world. But they did not remain immune from the global downturn and stock markets saw sharp falls.
But today, these emerging markets have recovered swiftly now that the majority of the problems in the credit markets have passed. As risk aversion has decreased and economic optimism increased, investors have once again focused on the superior growth prospects for many emerging markets, and this has pushed prices up even more rapidly.
Since the trough in March, emerging markets have outperformed developed markets very considerably. The Hang Seng China Enterprise Index (HSCEI) outperformed the FTSE 100 by 30 per cent between late April and early August, rising to 12,528. And the Chinese index has outperformed the FTSE 100 by roughly 45 per cent between from the beginning of the year, rising to 12,777.
This dramatic recovery resulted in some large gains for associated call covered warrants on the Chinese blue-chip index. A call warrant with an expiry date of December 2009 and a strike price of 10,000 has risen 118 per cent over the past six months.
With only two months left before this covered warrant expires, those investors looking to take a view in this market will be considering the use of the June 2010 or December 2010 calls or puts, depending on whether they think the index has further to rise.
Exchange-traded funds (ETFs) are an alternative way of getting involved in emerging markets if you are looking for easy access and to replicate the performance of the underlying index. However, covered warrants are more appropriate for investors looking to gear their exposure to emerging markets and leverage their returns on the HSCEI, for example.