Investors in Asia still favour yield enhancement products on US-listed names with tenor ranging between three months and a year, but fixed coupon notes (FCNs) were the structure of choice for most investors in 2017, according to Roger Meier, head of structured products advisory at Julius Baer in Asia.

Minimum redemption remains a niche product as clients prefer to have low strikes and though not a driver of activity in the structured products space, they are expected to pick up, especially in the light of the current pricing environment, namely the high stock market valuations and the rising US rates, according to Meier.

"The main driver continues to be the US stock market and if it continues to trade higher, there will be good interest for structured products in the region, mainly for yield enhancement products," said Meier.

FCNs were the most popular structured products in 2017 among investors in Asia, according Meier. "Due to lack of volatility throughout most of 2017, single underlying trades like equity-linked notes (ELNs) were less in favour and Asian investors turned to fixed coupon notes with multiple underlyings," Meier said, adding that this trend will continue in 2018 although the focus will be on downside protection, i.e. further pick up for structures with minimum redemption such as floored booster notes.

Despite the popularity of FCNs among investors in Asia, the focus in 2017 was not on multiple but on single underlying stocks, according to Per Nordstrom (pictured), head of sales at Contineo. "For example, Tencent was the most frequently traded underlying followed by US tech stocks such as Google, Microsoft and Alibaba," said Nordstrom. "In the current environment we will continue to see short term flow products, such as FCNs and ELNs linked to Asian and US underlyings, dominate with the private banks."

If market volatility persists, capitally protected structures will get traction among Asian investors, according to Nordstrom.

"Contineo saw a pickup in order volumes towards the end of 2017 that has continued in 2018," said Nordstrom. "In the first quarter of 2018, orders increased four times compared to the same period in 2017."

However, the positive momentum is not only a function of the market environment for structured notes but also the fact that more banks are becoming comfortable in dealing through multi-issuer platforms (MIPs), according to Nordstrom. "Contineo now counts 24 customers and we see that not only product specialists but more users within each bank are using the network. For example, dealing teams and relationship managers (RMs) have now integrated Contineo into their daily routine for pricing and order management," he said.

Structured products retain their appeal to investors by the market growth over the past 12 months both Singapore and Hong Kong, according to Meier. "This was driven mainly by equities as an asset class," said Meier, pointing that the on-going market uncertainty has also fueled demand.

"As a consequence, most of the structured products sold in the region allow clients to enter the market at a discount should they get exercised," said Meier. "Instead of buying a stock outright, some clients prefer to enter via a structured product."

Regarding the future of the market for structured products in Asia, Meier sees a clear shift to more conservative investments. "This includes lower strikes as well as a bit of a pickup in minimum redemption notes," he said.

According to SRP data for the Asia-Pacific, in 2017 there were a total of 33,891 structured products worth US$44.2bn linked to single underlyings, of which 22,844 (US$13.4bn) were linked to single shares and 11,047 (US$30.8bn) to single indices. On the other hand, there were 18,776 structured products worth US$72.2bn linked to multiple underlyings, of which 15,359 (US$61.4bn) were linked to baskets of indices and 3,417 (US$10.8bn) to baskets of shares.

Year-to-date, in terms of issuance, preferred remained the structured products linked to single underlyings with a total of 15,919 products worth US$13.4bn, of which 10,277 were linked to single shares and 5,639 to single indices. Similar to 2017, products on multiple underlyings, though less in number, sold better. There were 5,086 products worth US$19.2bn linked to multiple underlyings, of which 3,542 (US$13.9bn) were linked to baskets of indices and 1,544 (US$5.3bn) to baskets of shares.

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