Issuance of structured products in South Korea in July slipped by 6% on the month on increased uncertainty in global and local stock markets, with sales volumes down 5%, from KRW3.214bn (US$2.863bn) to KRW3.043bn, according to SRP data. The number of products added in July fell from 1.042 to 984.
Yields have suffered with the decreasing volatility and so autocallable structurers have had to find other ways to sell volatility.
But there is support in the market for a pick-up in fortunes. "We are positive that the South Korean structured market will undergo a revival, and has the potential to be bigger than before," said Soujit Ghosh, head of derivatives at Korea Investment & Securities.
"The relatively more attractive yields will be a major factor in driving the popularity of structured products in 2017," said Ghosh.
Ghosh suggests that the global trend of central bank rate cutting has already had a positive impact. "With deposit rates under pressure globally, more retail investors will move out of cash and look towards structured products in order to find enhanced yield," said Ghosh.
The combination of knockout/protected tracker/worst-of option remained the most popular payoff in July, featuring in 629 products worth KRW1.887bn. Other popular payoffs were digital (100), digital/knockout/ protected tracker/worst-of option (100) and knockout/protected tracker (60). There was an increase in the issuance of knockout/protected tracker products in July, which were double the number of the previous month.
The combination of Eurostoxx 50, Hang Seng Index and Kospi 200 featured in 139 products worth KRW414bn. The Dax index appeared in various index combinations and recorded KRW420bn of sales. Similarly, the FTSE China A50 and the Taiwan Stock Exchange Weighted Index attracted sales of KRW15bn each in the form of index basket combinations. "Central bank support has been an important factor in allowing retail investors to retain confidence in structured products linked to major European and US benchmarks, such as the Eurostoxx 50 and the SPX," said Ghosh.
The South Korean benchmark was the second most popular underlying, with issuance decreasing from 90 products in June to 81 with a volume of KRW243bn in July.
The issuance of equity-linked products decreased from 865 to 785, with sales volumes dropping from KRW2.589bn to KRW2.355bn. Derivatives-linked products saw an increase, both in issuance, from 177 to 199, and sales volume, from KRW539bn to KRW597bn. Commodities-linked products saw a slight increase from KRW174bn to KRW198bn over the month, with the combination of WTI Crude Oil and Brent Crude Oil the most popular coupling. "The high coupons of structured products in Korea are primarily driven by the volatility of the underlying assets, which is why products linked to WTI have been popular recently" said Ghosh.
"We believe that diverging interest rate policies between the US (potential rate hikes by the Fed) and other major markets could be the catalyst in driving the volatility of FX, commodities and other alternative underliers," he said.
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