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The merit in the extended term... - 08/04/2020

The recent market correction will be recorded as one of the most severe of all time, though the last few weeks have seen the Index slightly recover from its low of 4,993 on 23rd March. Is this the start of a recovery period? Or will things get worse? What if things got a whole lot worse?

The chart below shows a simulation of the very severe 1970s market crash as if it occurred now, on top of the recent correction, beginning on 6th April. This simulation takes the FTSE 100 to a low of around 1,550. A terrifying prospect. Obviously, we hope that nothing like this occurs but what this simulation shows is not just the fall, but also the recovery. Whilst it did take some years, the stock market did recover in the 1970’s. From the low reached in 1974 the main UK index of the day, the FT30 went on to rise by 150% over the following year and after several more, it went on to set new highs.

On the chart we have overlaid the reference points for Option 2 of a 10:10 Plan theoretically striking on 6th April 2020. This is not a prediction, or a forecast but it hopefully serves to demonstrate the potential value of long duration autocalls.

The longer an autocall runs, the greater the potential return because the coupons accumulate. The May 2020 issue of the 10:10 Plan offers investors a 10.6% simple return for each year the plan runs. If it matures on the first opportunity – the second anniversary, because the FTSE 100 Index is higher at that time, it will return 21.2%. If however, it takes a further eight years for the index to get back to where it was at the start of the term, the Plan is designed to mature paying a gain of 106% - even though the market will have done little more than go sideways over the ten year investment term – accepting of course that the FTSE 100 index does not account for dividends.

Option 3 of the 10:10 Plan requires the FTSE 100 to be 5% higher on a relevant anniversary to mature with a gain – and for Option 3 of the May 2020 issue the potential return is 12.65% for each year it is in force. Considering recent market falls, accepting that there is likely to be significant volatility for some years to come, is it any wonder that this plan is proving extremely popular.

The investment naturally involves putting capital at risk and a loss will materialise if the plan is encashed outside of a triggered maturity in adverse market conditions, if the FTSE is never above the maturity trigger on any relevant anniversary and is 30% or more lower on the tenth anniversary or, if the counterparty bank (Goldman Sachs International for the May 2020 issue) fails to the extent that is unable to meet its liabilities.

If recent events have proven nothing else, its that no one can predict short-term market movements. Further falls are possible, as is a rally. The defined nature of structured product terms takes the guess work out of future performance – you can simply ignore the daily noise and focus on the defined outcomes.

Full details of the latest 10:10 Plans can be found using the 'Products' tab. The closing date for the May 2020 issue is 15th April but like previous issues, it may have to close early in the event that it is oversubscribed. If you wish to invest, please contact us as we are operating with different procedures to negate the use of postal service at this time.

The figures used relate to simulated past performance and actual past performance which is not a guide to future performance.

If you have any doubts as to the suitability of this or any other investment for you please contact us to arrange a consultation with a Lowes Consultant.

Disclosure of Lowes interests: Lowes has provided input into the concept, development, promotion and distribution of the Mariana Capital 10:10 Plans. The provider's charges/fees are built into the terms of the investment - Lowes has a commercial interest in the Plans as a result of its involvement in their development and promotion. All Plan returns are stated after allowing for these charges/fees. Where Lowes is involved in advice on or the intermediation of these investments to retail clients, it will not receive any payment from Mariana for its input. The aim of developing plans in co-operation with providers, with Lowes input, is that they should be amongst the best available in the market. Lowes has robust systems and controls in place to ensure that it manages any actual or potential conflicts of interests in its activities.
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