Investec Bank promotes an investment product linked to Chinese equity market

Local investors seeking an emerging market investment that delivers low correlation to developed market returns can now invest in International Opportunities Limited, a structured five-year investment that offers exposure to Chinese equities with diversification, growth and capital preservation benefits. Investec Bank is the investment advisor and promoter of the company.

• Click here to find out more about International Opportunities Limited.

International Opportunities Limited was incorporated in Guernsey in October 2024 to buy financial instruments that create a structured payoff profile.

“Investors gain exposure to the structured product payoff through purchasing shares in the company” explains James Cook from the Investec Structured Products team.  

“At the start of a new offering, the company buys a debt instrument, an equity option and maintains some cash for fees and expenses.”

The company holds the same instruments until maturity, offering 100% capital preservation in USD if held until maturity. 

“In this case, the debt instrument consists of a credit-linked note and this provides the capital protection on the condition that there is no credit event by the issuer or the credit reference entities over the term,” explains Cook.

The latest structured product offering provides exposure to the Shanghai Shenzhen CSI 300 Index, which has a $6.2 trillion market cap.

The index consists of 300 of the largest and most liquid A-share company stocks in mainland China that trade on the two Chinese stock exchanges, the Shanghai Stock Exchange (SSE) and the Shenzhen Stock Exchange (SZSE).

Investec identified Chinese equities as a sensible investment for this structured product due to the upside potential following the CSI 300’s 31.7% fall since its high on 10 February 2021 to 09 December 2024.

“This drop in value hopefully offers a decent entry point with a relatively favourable valuation compared to other major indices” says Cook.

For instance, the 12-month historic price-to-earnings (P/E) ratio of the CSI 300 is 15.8 compared to 26.5 for the S&P 500 Index. The CSI 300 price-to-book ratio of 1.6 also compares favourably to the 5.2 of the S&P.

The diversification effect in a global investment portfolio is also powerful, delivering a 0.3-0.4 correlation to developed market indexes, such as the S&P 500, Euro Stoxx 50, and FTSE 100.

According to Cook, the combination of these factors creates a good payoff profile for the structured product.

“In this regard, the share will return the growth of the index multiplied by a participation of 130%, with index growth capped at 60%. Therefore, the maximum return is 78% (130% x 60%), which is equivalent to a maximum annualised return over the five-year term of 12.2% in US dollars.”

At maturity, shareholders have the option to redeem their shares or remain invested and gain exposure to the subsequent structured product payoff profile.

Cook highlights numerous investment return and growth benefits from reinvesting into subsequent structured products compared to investing directly in the market via an exchange-traded fund (ETF).

“Based on back testing that used historic data to calculate five-year (5Y) rolling returns since the Index was launched in April 2005, we determined that the CSI 300 5Y return was negative 27.6% of the time while International Opportunities Limited would have returned 100% of investor capital over the period, and the geared effect meant the simulated structured product outperformed the price-only index 86.2% of the time.”

Furthermore, rolling the payout at the end of the term into a new structured product effectively locks in returns by setting a new capital protection level with upside potential.

“This capital protection alleviates a major issue currently facing investors, whose only other choice to lock in profits from investments into indexes that have performed well like the S&P 500 is to sell some or all of their investment. This action, however, will prevent them from benefiting from further index growth.” concludes Cook.

Local investors require a minimum investment of US$10,000 and applications close on 7 March 2025.

Click here to find out more about International Opportunities Limited.

Disclaimer: https://www.investec.com/en_za/legal/structured-products-disclaimer.html