The bank has seen increased demand for income payoffs with downside protection and expects a renewed push for hybrid asset PPNs in 2023.
In an interview with SRP, Jung-Jin Yoon (pictured), head of global markets cross asset sales, Asia Pacific (Apac) at Société Générale, reflects on the structured product market in 2022 and shares his outlook on equity and hybrid asset strategies for the new year.
Jung-Jin Yoon (JJ Yoon) notes that 2022 was an extremely challenging year on equities across all markets, but on the flip side it was also “quite an impressive year” for fixed income in most Apac countries where structured products have typically been used as a means of generating stable income in a very low interest rate environment.
There is massively higher demand on principal-protected structures - JJ Yoon, Société Générale
“Today we are finally in a regime where cash yields,” said JJ Yoon. “Hence this has shifted the investment cycle from equities to fixed income driven by capped-floored floaters and fixed rate notes.”
Obviously, according to JJ Yoon, as rates pick up, the sentiment in the equities market has been fragile triggering a return to basics shift.
“There is massively higher demand on principal-protected structures. I don't think there has been any blockbuster new products in the market. It has been a return to basics,” said JJ Yoon.
What changes have you seen in the market in 2022?
JJ Yoon: One change we have seen is a slight divergence in investment duration. In Asia, investment cycles are usually one to two years. It goes to three years in terms of fixed income products. Now we see high-net-worth individuals (HNWIs) keeping their investment durations on structured products relatively short versus retail clients. This is potentially for tactical reasons as investors expect a rebound on equities and don’t want to get locked up on fixed income structures for too long. On fixed income, it is no surprise that clients are most familiar with interest rates, which is the largest asset class traded year-to-date I would say. Second is credit followed by foreign exchange (FX).
What difficulties has SG faced in expanding the structured product business in Apac?
JJ Yoon: One difficulty we have always faced in the Asia retail space is that the investment duration is very short. Investors tend to prefer income over growth [structures]. When it comes to structured products, usually the longer the maturity, the more room you will have to generate protection that investors can benefit from and the more structured alternatives we can propose.
As a market, if we are able to tackle this, it will create much more opportunities on structured products for Asian investors. Product providers are now much more conscious of their need to expand their offerings as we had never had a year like this where activity on equities have been tough for the full year over the past decade.
How has SG shifted its issuance and hedging strategy in 2022?
JJ Yoon: Last year there was a view that markets were on the higher end, so for us we continued to push products with more downside protection. That push is still ongoing, including the ‘three to one autocall’ or ‘switch-to-mono’ and Darwin structures. We have seen quite a few more clients onboard these payoffs with us in preparation for a renewed push in 2023.
In this principal-protected market where the usual structures include shark fin, twin win and digital coupon notes, a lot of the products traded are pretty vanilla in nature. Hence, we have been focusing on boosting income apart from relying solely on banks’ funding. One of our focus has been to come up with principal-protected notes (PPNs) where we generate income plus a call on a strategy.
Another key ongoing success we’ve had in 2022 is with our FX hedge and decrement indices which embed a fixed cash dividend component tracking benchmark indices such as the S&P 500, Eurostoxx 50 and Hang Seng China Enterprises Index. It is an offer that we have sold to both institutional and HNW investors for the past few years, but the range of indices evolves each year.
Could you explain how the ‘switch-to-mono’ and Darwin payoffs work?
JJ Yoon: For the switch to mono, SG has been the first bank to design the three to one autocall, a new payoff in Asia. If no autocall event occurs during a pre-defined period, this feature changes underlyings from worst of three indices to a mono underlying based on the least performing underlying on the relevant observation date.
Darwin is a six-month to one-year product designed for investors with a moderately bullish or bearish view on at least one underlying offering monthly fixed coupons. It comes with potential monthly early redemption upon autocall and possibility for the autocall observation to be linked to the best performing underlying at maturity.
What other offerings would you highlight and plans for 2023?
JJ Yoon: We also want to look at hybrid offers embedding principal protection, such as by renewing interest on mutual funds or quantitative investment strategy (QIS) where you have a mix of income and upside exposure. We have reached a level of rates that can be quite attractive for hybrid assets, whether it is on full principal protection or partial protection depending on our investors’ yield target.
On QIS, the bulk of the multi-asset offers in the market we have seen in 2022 have been on all-weather strategies, which is a mixed portfolio of equity, commodity, rates and FX with an aim to become more market neutral. Issuers then write call options on the back of these strategies as part of their PPN offerings. It is a key push that will continue into early 2023 as we still see solid demand.
On the ESG side, many of the strategies that had been sold were primarily linked to equities in the past years, where this was not free from the impact of the risk-off sentiment in 2022. However, we continue to see growing demand on this space both on retail and the institutional space. We've seen increasing demand in Apac when it comes to positive impact Formosa trades, more interest on multi-asset indices in Southeast Asia through a combination of exchange-traded funds (ETFs) on equities and bonds, and of course the interest on ESG thematic on principal-protected formats.
What is your view on the momentum of PPNs?
JJ Yoon: Speaking with clients and investors, there is a prevailing view on peak rates in 2023 which may lead to a downward trajectory on rates. Naturally, income will come down on PPNs which have been the central portion of the structured product development in Q3 and Q4 2022. Moreover, we have not seen a large portion in recovery products on equities, which I think showcases that sentiment has not turned bullish at any point throughout the year. This is an area where innovation on recovery can clearly have an impact primarily through the deployment of hybrid offerings. PPNs are likely going to be the focus for at least the first half of 2023 and see a transition to offerings with more risk towards the second half.
What is your outlook on the Japanese market in view of the recent regulatory intervention?
JJ Yoon: Japan has also been a tough spot starting from Q3 2022 due to the regulatory scrutiny on structured products sold to retail investors. There is some new guidance that awaits clarity going into Q1 this year. The concern from regulators is on the disclosure of fair value and fees on structured products, where regulators are seeking a more transparent framework. This comes as equities underperform and a lot of products have breached their put barrier resulting in investor losses.
Ultimately, it is a matter of product transparency, fee disclosure and product suitability and once we have clarity in January, I believe the equity structured product market will adapt and rebound. The fixed income market in Japan is a very mature market and has done quite well in 2022. This year we are looking forward to a good mix between both equities and fixed income in this region.