Deleveraging, hybrid baskets and the impact of platforms on bespoke structured products.

In Europe, companies are deleveraging, according to participants of the Wide angle: trends and opportunities panel, which kicked off the SRP Europe 2024 conference in London on 19 March.

We start to see much more multi-asset baskets - equity ETFs, bond ETFs bundled together in baskets that are being used as the underlying for structured products - Rahul Vyas, Barclays

The deleveraging is happening economy wide, in private sector companies, the household sector, mortgage lending and credit, said Harry Colvin, director and senior market strategist, Longview Economics, who moderated the panel.

“It is across sectors and hasn't happened since the eurozone crisis and then before that the GFC,” Colvin said.

Although the overall picture is uncertain, there are indicators that towards the end of the year there is the potential for more growth.

“Interest rates are going to be higher for longer,” said Juan Ramón Domínguez Recio, European head of investment solutions at BBVA, adding that deleveraging is good in the long run.

The current macro environment is also helping to diversify payoffs and underlyings for structured products.

More structured products are having a hybrid flavour, according to Rahul Vyas (pictured), managing director, equity derivatives structuring at Barclays.

“We start to see much more multi-asset baskets - equity ETFs, bond ETFs bundled together in baskets that are being used as the underlying for structured products, whilst there is also a flight to safety, with capital protection products linked to gold or gold ETFs,” he said.

Moving away from the Greeks, equity, and rates environment, 2024 is a big election year for the US, India, and the UK, and as a result structured products have appeared using underlyings that take advantage or express views on those elections.

Vyas has seen plenty of Trump baskets, comprising companies that will benefit from greater exports from the US versus imports, whilst there is also a renewed interest in Indian equities as underlying for structured products.

“We cannot ignore the US tech boom either as the Magnificent Seven remain [popular] underlyings for structured products.”

In fixed income, investors are looking for credit-linked product as they as they hope to “lock the carry with longer financing”, said Francesco Solazzo, head of investment products and co-head of fixed income solutions, Mediobanca.

“Autocallables are always going to be a staple part of the structured product diet, but there has been a significant shift towards capital protection products, driven by the rate environment,” said Vyas who added that equity volatility remains very low compared to history.

“Despite the various geopolitical events taking place across the globe, none of those seem to be a strong catalyst for causing equity implied volatilities to suddenly elevate.

“Having said that, while equity volatility remains low, interest rate implied volatilities are very high and that allowed for better pricing of issuer callable products,” he said.

Colving asked panellists whether they had seen any kind of volatility suppression happening because of over usage of structured products.

In Europe and the US, the realised volatility and correlation has been historically low, but in Asia there was a concentration of products linked to the Hang Seng China Enterprises Index, according to Domínguez Recio. “That was a reminder of the times that volatility was mainly driven by our structured products on the Eurostoxx 50 and S&P 500,” he said.

Equity valuations in many cases remain high and Vyas believes there are plenty of investors who are still interested in monetizing that remaining uptick in equities, “even if they don't think equities are going to the moon”.

“The way I see people doing that, in particular in the US market, is having leveraged exposure to the equity upside, but having a cap, you monetize in an accelerated way,” he said.

The emergence of platforms has helped to industrialise and automate the structured product marketplace, panellists agreed.

“We are able to achieve a much greater penetration of structured products and investor portfolios across the globe in a much more efficient way,” said Vyas.

Many years ago, standardised structured products with standard features were distributed through providers running campaigns. They were sold to the broader marketplace, but without any kind of customisation and there were hardly any bespoke structured products.

“We are starting to see wealth managers design very bespoke structured notes for individual investors and they are able to execute that very quickly in a cost-efficient manner through those platforms,” said Vyas.

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