Interest in Hong Kong derivative warrants (DWs) and callable bull bear contracts (CBBCs), among the most popular securities trading vehicles on the island, continued dropping in October, though not as much as in stocks and unit trusts.
Despite the broad slump in trading activity, however, investor bullishness was on the rise, with the overall proportion of 'Call' warrants, which bet on the upside, rising from 84.0% in September to 86.8% in October. In CBBCs trade was almost evenly balanced, with bearish bets retaining a small lead at 51.0% of the market, down from 54.7% in September.
The market remained largely dominated by the traditional top providers - JP Morgan, UBS and Credit Suisse. The three banks accounted for 79% of turnover in CBBCs and 53% in warrants. This is down from 81.2% and 57.5%, respectively, for September. "Rumour is that China Merchants Bank and ICBC are gearing up to enter the Hong Kong warrants and CBBCs market next year," said a Hong Kong-based investment banker, adding that Vontobel, one of only three warrants providers in Singapore, has already confirmed that it will also be listing warrants in Hong Kong in 2017. "A few players might be disappearing, but new ones are there to take their place, particularly with mainland China money flowing into Hong Kong products set to increase."
Turnover in DW dropped 14.7% on a monthly basis in October, to HK$160.8bn (US$20.7bn), the lowest figure for at least the past year, which compares with a monthly average of HK$250.0bn for the previous twelve months. Trade in CBBCs was down 15.4% last month, to HK$103.0bn, which is the second-lowest standing for the past year and compares with a monthly average of HK$131.7bn since October 2015.
However, the decline in DWs and CBBCs comes in the context of an even greater slump for equity trade, which was down 27.6% on the month to HK$832.8bn, 11.1% below the average for the past year. Unit trusts, the smallest category in HKEx's securities market, saw turnover plummet 39.7% to HK$58.3bn, the lowest in at least 12 months and just over half the monthly average for the past year. Overall securities trade in Hong Kong was down 25.9% on the month in October, after a 3.3% increase in September. The average daily turnover for the first 10 months of 2016 is HK$67.1bn, a decrease of 41% on an annual basis.
"While turnover may be on the downside in October, partly due to there being only 19 trading days versus the 21 in September, investment in warrants and CBBCs is robust," said Johnny Yu (pictured), managing director, head of public distribution Asia, UBS. "Starting from late October there's definitely more activity from the buy-and-hold crowd, and November is shaping up to be a good month overall."
Yu noted that there's quite a bit of uncertainty on the market, with Trump, the Fed and Brexit, as well as the upcoming Shenzhen-Hong Kong stock connect, well on investors' radar.
Activity in warrants remained largely focused on the household Hong Kong names, including Tencent, HKEx, HSI and HSBC Holdings. In CBBCs, trade remained almost exclusively limited to HSI, which accounted for 94.6% of activity, slightly up on September.
Trading activity continued dropping in Singapore as well, with total turnover in October declining 17.8% to S$632.1m (US$446.1m). Notably, investor bullishness was significantly on the decline in October, with the ratio of call warrants dropping to 56.3%, down from 73.1% in September and 82.7% in August.
According to SGX data as of November 17, the only 32.8% of the outstanding notional was in Call warrants, which compares with 65.4% as of October 18.
On Australia's ASX, total warrants turnover for October was A$122.7m (US$91.6m), down from A$133.0m for September.
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