COEs tied to foreign equity indices are gaining ground among Brazilian structured notes (certificados de operacoes estruturadas, COEs) which have already overtaken products linked to the local stockmarket index, according to a report by the Central de Custódia e de Liquidação Financeira de Títulos (Cetip), one of the clearing houses for structured products authorised by the Central Bank of Brazil.

Reasons such as a domestic recession, which has had a detrimental impact on the value of local businesses, and the positive outlook of the US and European economies, partly explain this movement, according to the report.

“Investors are seeing the possibility of diversifying their investment portfolios, with applications associated with the stock of foreign markets. The application of simplicity in a COE greatly facilitates access to these markets,” said Fabio Zenaro (pictured), executive manager in the products and business unit at Cetip. “We have seen individuals accessing foreign markets via COEs, but it is also an interesting product for foundations, a group that has not invested in the product, but is already looking carefully at this possibility.”

Year to date, the volume invested in COEs linked to stocks increased by 52% to R$6.1bn (US$1.7bn) at the end of June compared with January when assets under management on COEs stood at R$4bn. However, according to the report, the growth of COEs linked to international equity indices has rocketed, registering a 430% increase to R$942.5m in June. A breakdown by assets shows that COEs are mainly linked to inflation (45.32%), exchange rates (23.30%), international equity indices (15.51%) and domestic shares (11.81%).

“More than 80% of COEs linked to foreign indices are concentrated in the S&P 500, the German Dax and the Eurostoxx,” said Zenaro.

At Bradesco, said Paul Waack, director of treasury, 50% of the COEs launched are pegged to the exchange rate, however “much of the potential gain from the change in currency has been achieved and now this margin has become smaller.”

According to Waack, COEs linked to the exchange rate or currencies as well as certificates linked to inflation – which now account for 10% of the Bradesco – are in a downward trend compared with foreign equity indices.

The timing, said Waack, favours this kind of underlying as the poor prospects for the domestic economy are being offset by the stockmarket recovery abroad. “For investors seeking diversification, it is quite suitable,” said Waack, noting that COEs linked to foreign indices now account for 30% of the bank’s offering although no sales volumes were disclosed. “The other 10% are COEs linked to assets such as the domestic equity index, interest rates and gold.”

All Bradesco COEs linked to foreign indices are fully capital-protected structures or structures with 85% downside protection.

According to Waack, the search for diversification and the access to foreign markets made possible by COEs provide a favourable scenario for the market.

“It is easier to access foreign indices via COEs, and with the current economic outlook products offering exposure to foreign indices will continue to be appealing,” Waack said. “[This trend] will depend on the profitability potential [of these indices] and this may change as has happened with other underlyings such as inflation or the exchange rate.”

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