It has been a long time since South Africans experienced a stable exchange rate. Over the last three and a half years particularly, the rand has been highly volatile.
In April 2015 the local currency was trading at around R12.70 to the euro, but in less than a year it had fallen to nearly R18.50 after Nhlanhla Nene was dismissed as finance minister. It subsequently recovered to R13.50 to the euro in March 2017 and is currently trading at around R16.50 which shows just how volatile the currency can be.
This has been a challenging environment in which to make offshore investment decisions. It has been difficult to forecast where the rand might trade in a few months, never mind next year or thereafter.
South Africans wishing to invest internationally due to the weak performance of the JSE have therefore been caught in a conundrum. They may gain from better stock market returns offshore, but these could be eroded by movements in the rand.
The latest offering from Investec Structured Products however addresses this issue by providing investors with exposure to international stocks, but without any currency risk. The investment references the Euro Stoxx 50 Index, but is denominated in Rands.
Investec Euro Stoxx50 Digital Plus
The Investec Euro Stoxx50 Digital Plus Equity Structured Product is a three-and-a-half year investment, listed on the JSE. If the Euro Stoxx 50 Index is flat or positive after the investment period, it will pay a minimum 70% return. If the index is up more than 70%, investors will receive that full gain in Rands.
At the same time, the product offers 100% capital protection if the index is down less than 40% at maturity. However investors should note that if the index falls by more than 40%, the loss will be the same as if they had invested directly in the index.
“Investors will be exposed to the growth potential of European rather than South African shares, but they’re not playing the currency,” explains Brian McMillan from Investec Structured Products. “So if European shares go up, the index will go up and they will see a return. What they don’t get is the appreciation or depreciation of the rand during that period.”
The product avoids currency risk because investors are not actually invested in the index itself, but only in derivatives linked to it. Returns are therefore entirely rand-based.
“You get exposure to the 50 largest stocks listed in the Eurozone, but without having to take any money offshore, and without having to take a position on the exchange rate,” McMillan says.
Product benefits
Although the product is designed to be held to maturity, it will offer daily liquidity on the JSE. Investors who make early redemptions will not, however, enjoy the guarantees offered to those who remain in the product for the full period.
All the fees have been priced into the product, and will therefore not affect the investor’s return.
“Investors have had a few years of very low returns on the local market,” McMillan says.
“Over the last three-and-a-half years, the JSE Top 40 is up only a few percent, so investors are shying away from South Africa and looking for economies where there is growth.
“Investors have had a few years of very low returns on the local market. Over the last three-and-a-half years, the JSE Top 40 is up only a few percent, so investors are shying away from South Africa and looking for economies where there is growth.”
