New Investec structured product seeks to capture international opportunities
With government stimulus helping to revive the economy and stabilise the country’s housing market, China seems to be an attractive investment opportunity for South African investors that delivers low correlation returns to developed markets.
“We favour China as an undervalued emerging market and believe it offers good upside potential,” explains James Cook from the Investec Structured Products team.
Cook highlights various important attributes that make China an attractive destination for investors. For instance, despite the country’s recent economic slowdown, China remains the second largest economy in the world, with a GDP of US$17.79 trillion, compared to US$3.55 trillion in India and US$0.37 trillion in South Africa.
With a lower debt-to-GDP ratio (90.2%) than the U.S. (122.1%), the Chinese government also has more dry powder to continue stimulating the economy. The interest servicing costs in China are also lower than the U.S., with 10-year treasury yields at 1.65% in China compared to 4.25% in the U.S.
“COVID lockdowns, trade wars and concerns about the property market contributed to the decrease in the Chinese stock market since 2021. Investors who withdrew funds from the market will look to redeploy capital when sentiment turns more positive, and future government stimulus could act as the catalyst for this renewed interest in the stock market,” elaborates Cook.
While concerns exist regarding the potential impact of increased U.S. tariffs from the Trump administration, Chinese and U.S. trade data show that U.S. imports directly from China generate less than 3% of China’s GDP.
The latest World Economic Outlook report from the International Monetary Fund forecasts that a trade war waged by the U.S. and Europe against China that includes reciprocal across-the-board tariffs would potentially decrease China’s GDP by a mere -0.2% in 2025.
Another indicator of China’s potential to deliver investor returns relates to the performance of major indexes relative to GDP growth.
“Over the last decade, major indices have experienced growth that exceeds GDP growth in their respective countries, except for China. For example, the S&P 500 has delivered a 194% return compared to a 52% rise in U.S. GDP over a 10-year period. In comparison, GDP growth in China was 86.8% vs. 52.5% for the CSI 300 Index in USD, according to World Bank data.”
Against this backdrop, Cook says the market could see a correction in China where stock market performance tracks back in line with GDP growth.
In addition, emerging-market stocks performed best when Trump started his first term in 2017, with China emerging as the top-performing market with a total return of 56% as measured by the MSCI China Index.
To capture the upside potential in China, Investec launched International Opportunities Limited, a structured five-year investment that offers exposure to Chinese equities. Investec Bank is the investment advisor and promoter of the company.
The latest structured product offering from Investec provides exposure to the Shanghai Shenzhen CSI 300 Index, which consists of 300 of the largest and most liquid A-share company stocks in mainland China.
“Since its high on 10 February 2021, the CSI 300 has decreased by 32.1% by 31 December 2024,” says Cook.
Investors participate at an indicative rate of 130% in the growth of the Index up to a cap of 60% over five years. Therefore, the maximum return is 78% (130% x 60%) which is equivalent to 12.2% p.a. in USD. Investors also enjoy 100% capital protection in USD if the investment is held to maturity1.
The structured product makes it easier for investors to access this market while offering diversification, growth and capital preservation benefits, explains Cook.
“We feel this is a compelling value proposition, particularly for investors that may not know the major listed companies in China but still want exposure to the market.”
Cook believes that offering broader exposure to emerging markets has become critical for South African investors to diversify their portfolios, as they often have sufficient exposure to South Africa, and are generally overweight developed markets in their offshore portfolios.
“Developed markets have become relatively expensive, and portfolios heavily weighted to developed markets ignore emerging opportunities in the rest of the world, with significant value available in emerging markets like China and India,” he explains.
In this regard, exposure to China introduces a powerful diversification effect in a global investment portfolio, with return correlations of around 0.3-0.4 to developed market indexes such as the S&P 500, Euro Stoxx 50, and FTSE 100.
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
- The investor’s capital, in US dollars, is protected if the investment is held to maturity. Structured products provide principal protection through the assumption of credit risk. They are intended for sophisticated investors who understand and accept the risks associated. In this case, capital protection is achieved by buying credit-linked notes. Principal protection is preserved to the extent that the issuer continues to honour any outstanding obligations and the reference entities do not experience a credit event such as a default.
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