Plummetting financial markets have turned Asian investors and structured product creators to more bearish products as the volume of new issuance starts to shrink in the face of turbulent stockmarkets and volatile currencies which have led investors to lose money from related structured products, according to market players.
While there is less turnover for structured products as people tend to have their capital locked up safely, the surprise is that equity-linked products have not suffered as much as those based on other asset classes, said a structured products salesperson in Hong Kong. “Investors suffering losses were not limited to those investing in equity-linked products, with commodity- and foreign exchange-linked products suffering even more than equity-linked,” he said.
Investors in equity-linked products suffered a lesser impact as they are “more skilful and experienced since normally it’s more risky within equity market”, said the salesperson.
Furthermore, “corporate investors have subscribed heavily in FX products for risk hedging and these products include more leverage, so when China devalued the yuan by 3% against US dollar, these investors were hurt quite badly,” said the salesperson.
Given the shocks, the appetite for structured products will be very significantly reduced for the rest of the year, said a director at an investment bank in Hong Kong. “We are already seeing shrinking volumes in new structured products trades, and clients are asking for bearish structures,” said the salesperson. “The clients who asked for accumulators before are shifting to decumulators due to the sluggish market.”
Losses from direct investments in falling markets are being used by some bankers to showcase the difference in risk between direct stock investments and structured products. “Although returns from structured products cannot be compared with those of direct stock investments, structured products in China usually include capital protection and, hopefully, after suffering from the capital loss in the A-shares market, investors will see that high returns usually go with high risk and make their choices of investment more carefully according to their risk appetite,” said Angel Xin, head of derivatives investment at Ping An Bank in Shanghai.
With the performance of A shares leading the way down in Asian stockmarkets, the Hang Seng Index has experienced falls over seven consecutive days, taking the benchmark to 7500 points against its peak level in April. The benchmark index was at 21,119 at the close of business today (August 25). In Taiwan, the government has tried to stop the fall by limiting short selling as well as preparing national stabilisation funds for the rescue.
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Hong Kong Market Review - July 2015