The structured products market in Hong Kong is very equity-focused and flow-oriented compared to other retail structured products markets, however, in the last two years and particularly the last year, investors are opening up to more structures, payoffs and asset classes, according to Claire Arnaudo, head of third party distribution at Deutsche Bank in Asia Pacific (Apac). Investors in Hong Kong are interested mainly in short-term products with one-year tenors and below and they also favour Asian equity underlyings - ie. Hong Kong stocks, as well as US stocks, but they are also "very active in the FX space" and most recently of the bank has seen increased activity around principal protected products linked to interest rates and funds, according to Arnaudo.
"Hong Kong investors are more risk-taking than the classic retail structured products investors from most other markets," said Arnaudo "They trade a lot of non-principal protected products, which is very different from the retail structured products landscape in Europe, for instance. Over the last 18 months, fund-linked notes with protection have flourished in Apac though, especially in Hong Kong and North Asia."
Investors are trading more structured products in their quest for yield," said Arnaudo. "But, still, Hong Kong investors are probably investing equally between yield and growth products, which is not the case for other Asian markets, such as Singapore or South Korea, where investors are really craving for returns."
The German bank's outlook for the Hong Kong structured products market in 2018 is "very optimistic and positive", as trading activity across asset classes has been robust since the beginning of the year. "Unless [there is] a major shock in the market, we foresee a strong 2018 for structured products," said Arnaudo. "Almost all our clients have had their best month ever in January."
However, activity around credit has slowed down when you look the number of credit-linked notes traded in 2017, according to Arnaudo. "The run rate is lower this year due to tighter spreads, but we expect the business to eventually come back," said Arnaudo"Most of our competitors are strong in one asset class, whereas we have coverage across the board," said Arnaudo"Deutsche has an extremely robust fixed-income and credit platform and has strengthened its equity derivatives in the last two years, increasing the size of our structuring and trading teams in Apac. Additionally, we have a strong mutual fund and liquid alternatives platform, which is almost unrivalled."
Deutsche's cross-asset private bank business was up 23% in 2017 and the 2018 forecast is for 30% higher, according to Arnaudo, noting that new regulationssuch as Mifid 2 and 871(m) have affected the structured products business in Asia. "We have spent a lot of time with our regulatory advice and legal team on the implementation of these regulations," said Arnaudo. "The new rules put more constraints on both the manufacturers and distributors. That being said, we don't believe these regulations will hamper the retail structured products in Apac, but, instead,will open new opportunities, because some distributors previously working with closed architecture are opening up on the back of the regulations."
Deutsche plans to invest in business expansion, infrastructure and non-flow with the coverage of private banks remaining a priority for the German bank in the region.
"Private wealth in Asia will continue to grow in the coming years, said Arnaudo. "We have staffed the team and organised it to be more consistent with our clients' own set-up," she said. "We have an equity flow and fixed flow team, as well as a cross-asset non-flow team."
Additionally, the bank is increasing the size of both its flow and non-flow businesses with the aim of making it more scalable while pushing its FX structured products single-dealer platform, according to Arnaudo.
In non-flow, the bank is offering a new cross-asset product every quarter, based on clients' chief investment officer views and the bank's internal research. "We have excellent non-flow idea generation capabilities and we have closed several interesting trades recently," said Arnaudo.
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