March ended yet another positive month for the Italian market as issuance nearly doubled on the year, from 28 products in March 2014 to 54 this year, a 93% rise. Sales volumes followed a similar trend, rising by 77% on the year to a total of €824m.
With European quantitative easing (QE) in full swing, perhaps this should come as no surprise. By promising a debt purchasing programme worth €60bn a month, the European Central Bank (ECB) appears to have convinced nervous investors that a resurgent eurozone is on the horizon. It seems fitting that Italy – ECB President Mario Draghi’s native country – increasingly sees itself both as a crucial actor in and beneficiary of a eurozone recovery.
Aware of a growing sense of hope amongst Italian investors, French banking giant BNP Paribas seized on the opportunity and brought to market a generous offering of 20 new Athena certificates linked to a varied selection of domestic and European equity underlyings.
A stalwart of the Italian market, the Athena certificate has been somewhat overshadowed by its fancier cousin of late – the Phoenix certificate – which has risen in popularity thanks to its ability to make coupon payments even on observation dates which fail to produce a knock out. An Athena certificate is cheaper than a Phoenix, featuring only an autocallable option and a memory effect, meaning that if the certificate fails to knock out on a given observation date, the coupon rolls on and is added to the value of the next available coupon.
With less to be spent on options, manufacturers can offer more attractive coupons, which is precisely what BNPP have done: annual coupons vary from 10% to 16%. Set at a maximum tenor of three years, this means that many certificates can realistically offer 20% to 40%, an eye-catching figure in any market. Combine these rates of return with a soft protection barrier typically set at 70%, and one can see how Athena certificates remain an attractive proposition for many investors.
Aside from BNPP, who was the most active issuer in March, Deutsche Bank was busy, issuing seven certificates including a 10-year Steepener note linked to the 30 and 2-year constant maturity swap (CMS) rate. Of note was the German bank’s 5-year Phoenix autocallable certificate linked to AXA, offering annual coupons of 3.1% provided that the underlying remain at least above 70% of its initial level. Additionally, the certificate matures early and pays a further 3.1% for every year the plan has been in force if AXA closes above its initial level on any given observation date. Given AXA’s recent positive performance (the insurance company’s net income increased from €4.48bn to €5.02bn this year), the certificate looks likely to attract a lot of attention.
Oil remained an interesting proposition for investors in March. With the price of a barrel of oil considerably lower than most market analysts believe it should be (WTI crude is at $57.74 a barrel at the time of writing, while many expect a correction bringing it closer to $80), investors seeking a quick return are likely to have flocked to some of the oil-based products on offer in March, such as Banca IMI’s digital certificate linked to the S&P GSCI Crude Oil ER index.
Not everyone is convinced, however. A senior market operator warned that investors “should be careful to separate actual trends from gimmicks. Oil is a hot topic now, but many analysts forecast that prices will hover at the $50 mark for some time to come. The danger lies in short-term products long on oil, as they might not pay the returns many investors expect when they expect.”
Finally, an addendum from Borsa Italiana suggests a large issue of certificates are due next month from UniCredit, as the Italian stock exchange has authorised the bank to issue new Cash Collect, Express, and Outperformance certificates.
The full Italian market review for March will be available shortly.
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