HSBC: Investors in Japan shifting from macro to micro
HSBC has strengthened its presence in Japan’s structured products market and re-emerged as a bond provider. Nicola Pantone, managing director and head of institutional equity derivatives sales, Asia at HSBC, shares his views on the outlook for the market and for the UK bank in Japan. Pantone joined HSBC in 2011 after previously holding similar positions at Societe Generale, Deutsche Bank and Credit Suisse in both Hong Kong and London.
The number of notes structured by HSBC surged from 17 in 2012 to 42 in 2013, which it has steadily increased to 56 in 2014 and 32 in 2015 year-to-date, according to the SRP database. It has also re-emerged as a bond provider in 2015, with nine products; its last issuance before that was in 2012.
What are the reasons for HSBC’s increased activity in structured products issuance in Japan?
Equity derivatives is core for HSBC global banking and markets (GBM) and it is of strategic importance for us to grow it across the region, hence the need to focus on the Japanese equity derivatives market, especially after the implementation of quantitative easing (QE) and Abenomics in 2013.
Prior to 2013, HSBC didn’t have a large presence in Japan’s equity derivatives market compared with other countries in Asia. In 2012, we decided to allocate more resources to the country and increased our presence as many competitors retrenched post-financial crisis.
This proved successful and we have been gaining constant market share since 2012. Our aim is sustainable and stable growth, so we are intent on striking a balance between growth and profitability rather than rushing for market share.
We became an uridashi issuer in 2015 as a response to the strong demand from our clients for HSBC paper. This decision has allowed us to capture more private placement (PP) flows, enabling us to work with clients more on their exposure to single stocks and international equities, an area in which we are very competitive.
What are the trends in structured products? Apart from equities, which are the main drivers?
Current market resilience means that equity will continue to be strong, as evidenced by the Nikkei 225 passing 20,000 points in April this year. Back in 2013, indices were a significant component of volume in the uridashi market, driven by Abenomics and the weakening of yen, attracting both onshore and offshore investors.
Now that the market has settled, investors are moving from ‘macro to micro’, with less focus on indices and more on stocks. This is a trend in private placements and will continue.
Foreign exchange (FX), on the other hand, has been volatile and experienced a big spike this year. Some of the traditional equity flow has moved back to FX as retail investors look to capture opportunities provided by increased volatility. This could become a trend, but will obviously be subject to macro-economic influences.
In addition to equities, HSBC is looking to increase its rates and FX structured products, particularly on the private placement side.
What kind of innovation do you see?
There are two key trends transforming the market in Japan and across Asia – the increase in automation and the globalisation of investment. Firstly, the automation of things like trade quotes with straight-through processing are accelerating. For example, in Hong Kong and Singapore, HSBC, along with other investment banks, launched a multi-issuer platform that provides structured equity derivatives products to private banks and wealth managers. This is a game changer and, as trading volumes in Japan increase, there is potential for such a platform as businesses streamline.
Secondly, the globalisation of investment has meant that Japanese investors have started to look beyond their domestic stockmarket. There is now increased interest in US underlyings, mainly the S&P 500 index and single stocks, and, since the start of this year, more interest for European underlyings. Europe has entered the same QE phase that Japan experienced in 2013, which has contributed to the traction gained by the Eurostoxx 50 in Japan’s uridashi market this year.
There is increasing interest in index basket components, with global equity indices featuring extensively. Given that we have a global offering from Asia, and know our clients’ demands, we have been very successful in capturing European and US flows.
Comparing the discussion we had with clients months ago to now, I have the impression that the China story is starting to attract interest in Japan. We could expect products linked to the Hang Seng China Enterprises Index (HSCI) or Hong Kong stocks to be launched.
How would you characterise the demand for smart beta products?
Smart beta is one of the biggest areas of growth in equity derivatives. It keeps growing and structures that embed an aspect of protection are more likely to gain traction in Japan. Since the Nikkei 225 has reached 20,000 points, some investors have been more cautious in continuing to participate in the equity market.
Products that have an equity component combined with a dynamic hedging strategy, or a volatility cap mechanism, are also drawing interest. They allow an investor to maintain equity exposure while neutralising the eventual short-term correction of the equity market.