The market for structured products in Australia remains stable although with just a few distributors it is not like in Europe where there is much more sense of what all the banks are doing, according to Elizabeth Tian (pictured), director at Citi Global Markets Australia. "Australia is a very fragmented market."
In terms of volume and flow, the Australian warrants market has been solid but volume and turnover - ebbing and flowing, according to Tian. "In between reporting seasons and when there are no big macro events, volumes can be a bit quieter," Tian said. "Then during the Australian reporting season when the listed corporates report on results or during big macro events, we can see a substantial pick up in flow and volume."
When it comes to investor preferences, the ASX Mini SPI 200 index is the most popular underlying in Australia, according to Tian. "Normally, we also see with warrants a bit of a skew to shorts or puts, probably because a lot of the retail investors can go long in many different ways in the market," she said, adding that it is much harder for the retail investor to go short a stock outside of warrants. "They can go long just by buying the shares, ETFs or a managed fund but when they want to go short it is relatively harder for the retail investor and they use warrants as a way to short."
The interest towards ETF underlyings has also increased in Australia, Tian said. "Obviously, ETFs are becoming bigger and bigger in Australia and there are a lot more providers, a lot more new ETFs, and we are issuing more and more underlyings as a result," said Tian. "Australian High Yield Equity style ETFs remain the more popular ETF underlying's with Citi's investors, but there has also been increasing interest in more thematic ETFs and ETFs giving investors exposure to offshore equities. We typically issue 50-70% geared instalment warrants over the ETFs."
Drivers in the warrants market are different on the investment side and on the trading side, according to Tian. "Notably you have what's classified largely as investment warrants and trading warrants," said Tian, adding that, on the investment side, it is primarily investors looking for yielding stocks and products that work effectively with Australian tax system and superannuation investments that stimulate the Australian retail investor.
"On the yield side, investors still prefer the 50% installment warrants over the high yielding stocks and we see them harvesting the stocks throughout the dividend period."
Australia's big banks, according to Tian, are still very popular in terms of single stock underlyings in the yield names. "A lot of the flow is still self-managed superfund money and that is because of the tax system in Australia, where franking credits from dividends can be a benefit for self-managed superfund investors," she said.
In the trading space, apart from indexes, thematics have been popular in Australia. "An example is when we saw the Australian dollar quite strong a few months ago trading above 80 cents, with the movement in the currency we saw more interest in currency Minis," said Tian. "Other thematics that have been topical was the news that Amazon was coming into Australia. We saw consumer discretionary names in Australia sell off and we saw a pickup in interest in Mini shorts in some of the retail names such as Harvey Norman, a large Australian retailers in the consumer discretionary space specialising in furniture and electronic sales," said Tian. "So, definitely thematics have been driving flow in that market recently."
According to Tian, the fairly low interest rate environment in Australia is influencing the market for warrants. "We have seen, however, that even though interest rates have been falling since the financial crisis in 2008-9, there has actually been a lot of de-leveraging and I am sure this is not specific just to Australia," Tian added. "Since Australian household debt is very high, a lot of investors are concentrating on paying down their household debt rather than necessarily increasing leverage and with the low interest rate environment we have seen an increased interest in yield products both within and outside of warrants."
Investors are currently looking for new ETF underlyings, according to Tian. "We are always adding new underlyings and the Australian ETF market has expanded from very vanilla index ETFs to also offering thematic ETFs and we get phone calls to issue new structures on that," she said.
A year ago, Citi introduced a new structure - the bonus certificates. "It took us about a year to educate the market, as it was the first of this payoff in the warrants market in Australia but these products are starting to get good flow and momentum with brokers and investors implementing the use within their portfolios," said Tian. "Looking for the future, we are interested in structures that have been popular over in Europe. Citi have the European warrants desk we work with. And obviously Europe is a big leader in warrants and we look to see what is popular there and potentially have a look at whether it fits in Australia."
Currently, Citi, together with UBS and Westpac, are the main players on the market for warrants in Australia, according to Tian. "Compared to our competitors, we offer a much greater range of warrant types - instalment warrants, trading warrants, turbos, minis, bonus certificates, etc.," Tian said, adding that, in this sense, Citi has much more breadth in terms of structures. "We have over 2,000 warrants issued. That is probably not big for Europe but it is big in Australia," she said. "Additionally, we have got lots of different underlyings - probably 300 - including over 50 ETFs and LICs and different asset classes such as equities, international equities, currencies and commodities, while our competitors typically are only issuing instalment warrants on single stocks."
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