Friday, 1 March 2024 Reading time : 2 minutes

Stock markets around the world have made a buoyant start to the new year, extending their year-end rally in many places. The US benchmark index S&P 500 climbed to new highs in January before closing above 5,000 for the first time in its history in February. European equities are also experiencing an upswing. Admittedly, the Euro Stoxx 50, which represents the largest listed companies in the eurozone, is trading well below the record levels reached in March 2000. However, the rebound in recent months has been remarkable, taking the index to its highest levels since the summer of 2007. Meanwhile, the Swiss stock market has performed rather modestly, with the SMI barely moving following a mediocre performance in 2023.

Given the sharp gains in many stock markets, it is understandable that investors are wondering how long the rally will last. However, the upward trend could just as easily continue – it is uncertain how equity markets will perform in the coming months. In this environment, an investment solution that allows you to participate in any further gains in equities, while reducing potential losses compared to a direct investment, may be attractive. 

The investment solution

Limiting the downside risk while benefiting from rising equity prices: the investment solution for these requirements can be found in the structured products area, specifically in the form of a cushion participation certificate, which can be structured on individual equity indices.

As the name suggests, the certificate is classified as participation product, meaning investors participate in both price gains (upside participation) and price losses (downside participation) of the underlying. Ultimately, the appeal of the certificate lies in the structure of these two components. For example, if the upside participation is 100%, the investor participates fully in an upward movement of the underlying index. The certificate is often capped, which limits the upside potential. The maturity is fixed, and it should also be noted that no dividends are paid.

On the other hand, the downside participation dampens a possible decline, as price setbacks are partially cushioned. For example, if the downside participation is 50% and the equity index is trading 10% below the initial level at the final fixing, the losses for the certificate holders will be halved to 5% (cushion). This reduces the loss at maturity compared to a direct investment in the equity index. 

Expectations matter

The cushion participation certificate is suitable for investors who expect the relevant equity index to move upwards, but do not anticipate any price fireworks in the coming months and at the same time want to reduce the downside risk. The focus is always on investor expectations. The product is therefore ideal in a rising stock market environment, as is currently the case in the US. But a cushion participation certificate can also be attractive when stock markets are moving sideways, as we are seeing in Switzerland. In both cases, investors benefit from further price gains up to the cap level, while reducing the potential for losses.

Cushion Participation Certificates in Subscription

ZKB Cushion Downside Participation Certificate with Cap SMI Index
Upside: 100%
Downside: 50%
Cap: 115%
Valor: 132910653

ZKB Cushion Downside Participation Certificate with Cap S&P 500 Index
Upside: 100%
Downside: 50%
Cap: 116%
Valor: 132910670

ZKB Cushion Downside Participation Certificate with Cap EuroStoxx 50 Index
Upside: 100%
Downside: 50%
Cap: 129%
Valor: 132910669

Indicative terms

 

Disclaimer

This communication is for marketing purposes. It is neither an offer nor an invitation to submit an offer, to purchase or to subscribe to securities and does not constitute investment advice. You should consult your advisors before making an investment decision.
Forward-looking statements are subject to known and unknown risks, uncertainties and other factors that may cause the actual results, financial condition, development or performance of the issuer to be materially different from any future results, financial condition, development or performance expressed or implied by such statements.
The present document has not been drawn up by the research department as defined in the rules of the “Directives on the Independence of Financial Research” published by the Swiss Bankers Association, hence these rules do not apply to this document.
If securities are mentioned in the communication, the base prospectus, the final terms and any key information document may be obtained free of charge from Zürcher Kantonalbank, Bahnhofstrasse 9, 8001 Zurich, VRIS, and from www.zkb.ch/finanzinformationen.