Equity investors are familiar with the age-old strategy of “buy low, sell high”. But what can you do in a range-bound market? One can look at the equity markets and observe that stocks in general are performing like a pod of dolphins swimming in the open sea. Certain dolphins will leap out of the water and dive back down shortly, while others barely breach the surface.

Just like how dolphins swim, many may think that the most common-sense method to monetise the stock’s movements is to identify and time each stock’s price range, which is to buy low and sell high. Well, that is a perfect fairy tale come alive. In reality, not only does that require skills, one also has to ride and navigate through numerous uncertainties in the actual world. Hence, rather than timing the market, the most logical move for investors is to determine whether the stocks they want to buy have attractive valuations.

While recent global market data has been encouraging and is showing signs of recovery, the financial markets were rather choppy in September. After the remarkable rally from the lows in March, the Nasdaq Composite Index has fallen about 11.8% from the peak (as at Sept 23). The current gridlock on the next US stimulus package, rising number of Covid-19 cases in Europe and the US presidential election next month suggest that there could be more volatility ahead.

What does this mean for investors? The current market conditions actually present an opportunity for those who missed out during the March rally with stocks that have actually fallen to more attractive valuations compared with a month ago.

As investors identify ideal valuations, most may be sceptical about investing directly in stocks. At this juncture, you may want to know more about a commonly available wealth product.

Equity-linked investments

Equity-linked investments (ELIs) — which have short-term investment periods of two weeks to a month — are funded, structured investment products regulated by the Securities Commission Malaysia and offered by licensed financial institutions such as banks. They are linked to the underlying performance of share prices of listed companies. Highly customisable products, they are priced individually for specific investors to trade. The products are sold by certified Premier Relationship Managers and potential investors will usually go through an investment risk-appetite assessment to ensure product suitability.

To enter a trade, investors will (1) select a reference stock, and (2) determine the potential discounted share purchase price or “strike price” that they would be comfortable buying the share at. The Premier Relationship Manager will then inform them about the best interest yield that can be achieved during the investment period. ELI yields are usually higher than the prevailing fixed deposit rates offered by banks.

The recent volatility experienced in the global equity markets has driven ELI yields for some sectors in Malaysia from 20% per annum to over 100% per annum.

In the following scenarios, an investor has identified that XYZ Bhd is projected to trade within the range of RM4.50 to RM5.00 over the next quarter. He can reach out to his Premier Relationship Manager to enquire about the ELI pricing on the share and receive an indicative pricing, all in a relatively short period of time of a day. The indicative pricing could be a two-week ELI with a strike price at 95% of the current XYZ share price, with an 18% per annum interest yield.

In the following two scenarios, we will discuss when and where the investor should enter the market by using the analogy of how a dolphin moves in the sea.

Dolphin in the water

— entering at the lower end of the range

For example, if the investor manages to time the entry at the lower end of XYZ’s range, at RM4.60, for example, the strike price will be 95% of its current share price or RM4.37. This will mean an ELI investment of RM109,250.00 (based on 25,000 number of shares/units one can potentially get, depending on the strike price at expiry observation) for two weeks, with 18% per annum interest yield.

At maturity, the investor will get an interest return of RM756.35, being 18% per annum on RM109,250.00. Expiry observation will also be made on the prevailing share price of XYZ. Assuming that the share price resumes the normal rangebound pattern and is at RM5.00, the investor will receive RM109,250.00 back in cash. If the share price has gone further below the strike price to RM4.40, for example, the investor will receive 25,000 units of XYZ in his share trading account, being RM109,250.00/RM4.37 per share.

In both outcomes, the investor will receive a high interest yield. If the shares are delivered at the strike price, which is lower than the projected range, the investor may consider this a discounted entry and sell his shares in the open market later when the dolphin pattern re-emerges. If the shares are not delivered, the investor may reinvest into the ELI, or what is defined as “rolling” the investment, provided the market view remains similar.

“Just like how dolphins swim,
many may think that the most
common-sense method to
monetise the stock’s
movements is to identify and
time each stock’s price range,
which is to buy low and sell
high.”

Dolphin above water

— entering at the higher end of the range

Following from the previous scenario, in which the shares were not delivered, XYZ’s share price would now be higher at RM5.00. The investor decides to roll his ELI investment for another two weeks. The refreshed pricing could be a strike price of RM4.75, being 95% of the prevailing market price, with an ELI interest yield of 22% per annum. This could mean another RM109,250.00 investment in ELI, representing a potential share delivery of 23,000 XYZ shares.

At maturity, the investor will get an interest return of RM924.42, being 22% per annum on RM109,250.00 over two weeks. Expiry observation will again be made on the prevailing share price of XYZ. Assuming the share price stays at the top of the range at RM5.00, the investor will receive his investment of RM109,250.00 back in cash. However, if the share price continues the range-bound pattern and goes below the strike price to RM4.50, for example, the investor will receive 23,000 units of XYZ in his share trading account, being RM109,250.00/RM4.75 per share.

Again, in both outcomes, the investor will receive a high interest yield. If the shares are delivered at the strike price of 95% of the prevailing market price, the investor may consider this as a discounted entry and wait for the dolphin to re-emerge to sell in the open market. If the shares are not delivered, the investor could consider rolling the ELI again, provided the market view remains similar.

Discounted strike prices and high interest yields

Using ELIs, investors can potentially benefit from purchasing the target shares at a discounted strike price. Some investors will use ELIs as a way to average out entry costs for targeted stocks. Do note, however, that if shares are delivered, it also means the investor’s value in cash terms will be worth less than when they first invested. This is the inherent risk of ELIs, and similar to outright equity investment, where share prices can go up or down.

The benefit of ELIs is the higher interest yield. In both expiry observation outcomes, an investor will always receive the higher interest regardless of where the underlying share price is at. This allows him to obtain more value from his idle cash compared with putting money into conventional deposit products. Yield-enhancement structures like ELIs could provide a temporary relief in an especially low and extended interest rate environment.

Please contact your Premier Relationship Manager for more information about this investment product. You may obtain the Product Highlights Sheet from the bank, and you are advised to read and understand all related product documentation before you make any investment decision.

Disclaimer:
This video and its contents have not been reviewed by the Securities Commission Malaysia ("SC"). This video is for educational purpose and is directed only at persons which are falling within the categories in Schedule 6 and 7 of the CMSA ("relevant persons in Malaysia") and shall not be made available to persons which are not relevant persons in Malaysia. The persons accepting this document represents and warrants that (i) they are lawfully able to receive this document under the laws of Malaysia and (ii) they are relevant persons in Malaysia. This video is produced for information purposes by RHB Bank Berhad ("RHB Bank"). The information provided in the video does not contain a complete analysis of every material fact. It does not take into account the specific investment objectives, financial situation or particular needs of any particular person. Without prejudice to the generality of the foregoing, please seek advice from an independent expert such as a financial adviser regarding the suitability of any investment product taking into account your specific investment objectives, financial situation or particular needs before you make a commitment to purchase the investment product. In the event that you choose not to seek independent expert advice, you should consider whether the product in question is suitable for you.

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WARNING: THE RETURNS ON YOUR STRUCTURED PRODUCT INVESTMENT WILL BE AFFECTED BY THE PERFORMANCE OF THE UNDERLYING ASSET/REFERENCE, AND THE RECOVERY OF YOUR PRINCIPAL INVESTMENT MAY BE JEOPARDISED IF YOU MAKE AN EARLY REDEMPTION. THIS STRUCTURED INVESTMENT IS NOT PROTECTED BY PERBADANAN INSURANS DEPOSIT MALAYSIA.