CAPE TOWN - With emerging markets benefiting largely from positive investor sentiment recently, specialist bank and asset manager Investec has designed a new product that gives investors exposure to the iShares MSCI Emerging Markets Exchange Traded Fund.
Investec’s Emerging Markets Digital Plus Equity Structured Product (Digital Plus ESP) is a listed instrument on the JSE and can be bought via a stockbroking account in rand. The return is paid to investors in rand, therefore, no currency risk.
For the first time since the end of the global financial crisis, the world’s major economies are growing at once. The International Monetary Fund has predicted that the world economy will expand by 3.9 percent in 2018, from 3.7 percent in 2017 and 3.2 percent in 2016.
This co-ordinated economic upswing is also supporting renewed optimism among investors. The positive environment for stocks is attracting record inflows into equity markets worldwide and benefitting emerging markets.
In 2017 they delivered significant out-performance, with the MSCI Emerging Markets Index up 37.28 percent in US dollars compared with 22.4 percent growth in the MSCI World Index.
Many analysts expected this out-performance to continue. Even though emerging market valuations were not as compelling as they were a year ago, they remained attractive relative to both developed markets and historical levels.
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.
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 Digital Plus ESP is a three-and-a-half-year rand-based investment. If the iShares MSCI Emerging Market ETF is up as little as 0.1 percent at maturity, investors will earn a minimum 35 percent return. They will also earn the full upside above 35 percent if the ETF returns more than that.
If the ETF is down, however, investors will enjoy 100 percent capital protection as long as it does not end down more than 30 percent. Beyond a negative 30 percent 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.”
The Emerging Markets Digital Plus closes for investment on 23 March 2018.