The volatility spike earlier this year has resulted in a surge on demand for discount certificates in the German market. SRP spoke to Anouch Wilhelms (pictured), director, equity markets & commodities, public distribution at Commerzbank in Germany about recent trends in the certificates market, and how to make use of these instruments at different stages of the market cycle.

In February and March, the yields for discount certificates were much more attractive than in November and December last year, according to Wilhelms. "Recently, discount certificates, linked to German stocks like RWE and Allianz have been very popular," said Wilhelms, pointing that this is product that could be ideal for the current market environment. "Besides the attractive yield, the current market situation with a higher level of volatility is another aspect that speaks for discount certificates. Investors who believe the DAX may lose some of its high during this year, they can reduce their risk by investing in discount certificates."

In the current environment, deep discount certificates are the most popular and more interesting structure as they offer great yield, but the real innovation is coming from the underlyings side of things as opposed to the payoff profile.

Year to date, the most popular underlying has been the RWE share followed by Allianz which can provide "very attractive payouts" when deployed via discount certificates, according to Wilhelms.

"US indexes, such as the Dow Jones Industrial Average, S&P 500 and Nasdaq 100 were very popular," said Wilhelms. "This was not the case a year ago, the US stock markets are attracting investors again and the European markets appear less interesting compared to the US."

Another recent short term trend is the rapid increase in the price of oil, especially the North Sea variety Brent.

"The price of oil has gone up again, and that has been a hot topic lately," said Wilhelms, noting that the pricing environment remains challenging and a number of structures such as "Best-End Certificates" which had an averaging payoff offering an 80% participation in the equity index, can no longer be marketed as "you can only offer a 40% participation, which has no added value for investors".

Commerzbank is market leader for capital-at-risk products in Germany, according to the latest DDV report. In the knock-out leverage and factor certificates segments Commerzbank is also the top provider with a market share of 21% and 59.28%, respectively.

According to SRP data within the first four months of the year there were 53,576 discount certificates offered to German investors.

DJ Industrial Average was used in 1,082 certificates. S&P 500 was the underlying index for 955 products. Nasdaq 100 was used 661 times. Brent crude oil linked products amounted to 146 products. The DAX was the most popular underlying with 5,738 products, followed by the Eurostoxx 50 with 3,202 products linked to it.

During last year's same period there were 59,531 discount certificates issued, with the DAX as the most prominent underlying (5,680 products), Eurostoxx 50 (3,030). The DJ Industrial Average (464), S&P 500 (531) and the Nasdaq 100 (525) indices as underlyings were less used as so far this year.

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