SocGen: Japanese uridashi market growing despite challenges
The Japanese market has seen an increasing demand in the uridashi segment this year with sales of equity-linked structures booming. New foreign underlyings such as the Eurostoxx50 have also made inroads into the market, adding a widening scope for investors beyond traditional Nikkei225-based products. Hideaki Takahashi (pictured), head of cross asset solutions for Japan at Société Générale (SocGen) CIB in Japan, shared his views with SRP regarding this year's local market environment.
Both index and stock-linked products in Japan have seen increased sales this year. What do you think were the contributing factors?
The equity index and stocks-linked structured notes market has, in fact, grown to a substantial size over the past ten years. The phenomenal popularity of these notes comes from the very structures that underline the products - a combination of reasonably priced underlying and down-and-in put options allowing the investors to enjoy relatively higher coupons, as long as equity markets do not fall below the designated knock-in barrier. They appeal to retail investors even in slightly bearish markets because of the sufficient conditional protection. Another reason for such a spike in sales is that the equity market has performed positively, frequently hitting the trigger level above which products were redeemed. This resulted in the majority of investors reinvesting their proceeds into newly issued notes with same structure and even with more capital than before.
We saw the introduction of the Eurostoxx50 in the market this year. Do you see any other foreign indices with potential being introduced to the market? What kind of challenges would they face?
The first condition in order to be popular as an underlying within the market is the level of acceptability and popularity amongst the investing public. Obviously, Nikkei is well-known domestically as we would typically expect from any broad market equity index of developed countries. Furthermore, the economic environment has to be strong to sell. The reason why demand for S&P500-linked structures has picked up in the market since late 2012 was due to widespread expectation for the US economic recovery. I believe that the biggest challenge for the Eurostoxx50 is to cultivate a strong brand name in the mind of Japanese investors, and more apparently the pace of recovery of the eurozone's economy.
In light of the challenges in the pricing environment (low interest and low volatility), do you foresee more innovation or complexity around payoff-types?
There is not much complexity around payoffs in the uridashi segment because structures must be simple and transparent enough to be sold to the mass market and to make retail investors fully understand the risk/reward profile. We foresee more innovation and complexity on the payoff side as tailor-made products and private placements gain traction. For example, if volatility remains low, then we could see more worst-of structures linked to several assets as well as higher volatile underlying assets. On the other hand, if yen rates remain low, then we may see more foreign currency-denominated equity products.
Japan has a well-established structured products market. How is the current regulatory environment in the domestic market?
The Japanese market has gone through several regulatory changes and as a result -particularly after 2008 - distributors are facing more difficulty in selling complicated products due to stricter requirements regarding the marketing and disclosure of product details in termsheets. A sudden reversal of the tight regulatory stance regarding structured products is very unlikely. However, there should be enough room for products to be revised and adjusted to meet investors' needs while staying in line with regulatory standards.
Takahashi joined the Tokyo branch of Société Générale Securities as a director of structured products in 1998.He joined the Tokyo branch of Deutsche Securities in 2004 but returned to the French bank in 2007 as head of distribution. He has been head of cross asset solutions for Japan since May 2012.
Hideaki Takahashi is head of cross asset solutions for Japan at Société Générale.
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