Investec Bank’s new investment product targets Emerging Markets

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For the first time since the end of the global financial crisis, all of the world’s major economies are growing at once. The IMF is predicting that the world economy will expand by 3.9% in 2018, up from 3.7% last year and 3.2% in 2016.

This co-ordinated economic upswing is also supporting renewed optimism amongst investors. The positive environment for stocks is attracting record inflows into equity markets worldwide.

A major beneficiary of this positive investor sentiment has been emerging markets. Last year they delivered significant out-performance, with the MSCI Emerging Markets Index up 37.28% in US dollars compared to the 22.40% growth in the MSCI World Index.

Many analysts expect this out-performance to continue. Even though emerging market valuations are not as compelling as they were a year ago, they remain attractive relative to both developed markets and historical levels.

Investment Case

This is therefore a sound investment case to be made, but many are still concerned about the risks. Emerging markets have historically been very volatile, and there are political concerns about the likes of Russia, Turkey and Eastern Europe.

To balance these factors Investec has therefore designed the Emerging Markets Digital Plus. It gives investors exposure to the iShares MSCI Emerging Market ETF, but offers both enhanced upside and reduced downside risk.

Brian McMillan of Investec Structured Products explains: “South African investors might see the opportunity in these markets, but have questions about the sustainability of returns. The capital protection therefore gives them the confidence to diversify their portfolios, but with an added level of comfort.”

The Emerging Markets Digital Plus is a three and a half year rand-based investment, listed on the JSE. If the iShares MSCI Emerging Market ETF is up as little as 0.1% at maturity, investors will earn a minimum 35% return. They will also earn the full upside above 35% if the ETF returns more than that.

If the ETF is down, however, investors will enjoy 100% capital protection as long as it does not end down more than 30%. Beyond a negative 30% return investors will have full downside risk.

As all of the costs are built in, these quoted returns are net of fees and other expenses. South African investors will also not face any currency risk as all returns will be calculated and paid in rands.

McMillan says: “We’re looking to provide investors with offshore exposure to the index, however our outlook for the rand is more stable than it has been for the last few years and therefore we are offering the product in rands.”

Open for investment

As the Emerging Markets Digital Plus Equity Structured Product is listed on the JSE, it can be purchased through any stockbroking account. The minimum investment is R50 000, with increments of R10 000 above that.

The product has been designed to be held to maturity, but the investment offers daily liquidity, and investors can sell their holding at any time. However, if they do so before the maturity date they may not realise the full value of their investment and the principle protection will not apply.

Importantly, this is a credit-linked product, which means that investors will be taking on senior unsecured credit risk on both Investec Bank Limited and FirstRand Limited.

McMillan concludes: “Any investment comes with some measure of risk, but by using a structured product like this, investors can be confident that those risks are reduced while they still have the potential to benefit from uncapped positive returns.”

The Emerging Markets Digital Plus closes for investment on 23 March 2018.

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