Equities rally to foster demand for structured products, Guotai Junan Securities

Investors in structured products in Hong Kong have a particular flavor for different Asian structures products that are being sold there and demand for structured products over the past few years has increased as a result of the equity and the credit markets rally in the region. SRP spoke to Fan Wang, director of the equity derivatives department at Guotai Junan Securities (Hong Kong) Limited, about market challenges, the competitive landscape and the products that will drive activity in 2018.

The Hong Kong market is heavily regulated and for retail investors to be able to take part in a structured products program, they need to be classified as professional investors who have a fresh hold of US$1m investable assets, according to Wang.

"People want to leverage their outside participation in both underlying markets - equity and credit - though leverage features using structured products," said Wang, adding that he expects another bull year for the domestic structured products market, especially in the equities space.

The biggest challenge the market for structured products in Hong Kong is facing, however, is regulation, according to Wang. "There are regulations coming from Europe and the United States (the European market infrastructure regulation, CFTC, MiFid, etc.) that influence the local market," said Wang, adding that Guotai Junan Securities has invested and upgraded its systems to meet the new requirements.

"Most investors demand especially reverse enquiry where clients have a particular investment objective and there are certain investment targets they have in mind," said Wang. "The preferred underlyings in Hong Kong are equity and credit." Additionally, the tenors tend to be a year or less given most of the products have a leverage feature and are capital protected, according to Wang.

Guotai Junan Securities, Hong Kong, is one of the top Chinese brokers in Hong Kong and is seeking to become a global financial player, according to Wang. "Traditionally, we have been just a cash equity broker, but now we want to be a supermarket for various financial products," said Wang, adding that the company is working to bring a number of products to the market. "Given that most Chinese investors have different preferences and needs compared to typical clients from international banks, this is our company's valued added in terms of services provided to them. Additionally, we also have a deeper connection with our Chinese clients. We know them very well because we have done the IPO for them and that is why we willingly give them bigger credit lines when it comes to offshore financing, simply because we know them very well onshore."

Wang also noted that the firm has a large balance sheet compared to most of the secondary banks and it has a very sophisticated and deep knowledge about the security markets both in China and in Hong Kong and is well equipped to operate in this market.

"Currently we have larger client asset custodian with us compared with other Chinese brokers in Hong Kong and undoubtedly this gives us a lead a few years ahead compared to other competitors," said Wang.

Market sentiment

Wang points that the Hong Kong market has seen a reduction in the complexity of the products offered whilst capital protection is "very hard to achieve in this low-interest rate environment simply because the risk-free interest rate is too low for us to structure any interesting payoff".

"We think investors' sentiment has slipped the other way around," said Wang. "They would actually pay the low interest and get leverage to participate in the asset appreciation that we have seen since the start of quantitative easing."

According to Wang, 2017 was mostly driven by the rally of both the Hang Seng Index (HSI) and the Hang Seng China Enterprise Index (HSCEI) - the two major Hong Kong indices. "We see a lot of local onshore investors with offshore dollar accounts participating the rally," said Wang. "We also issue products around this region. I think this scene will continue in 2018."

Wang believes that there is a lot of demand for leverage and inverse products among investors in the market. "Hong Kong investors specifically demanded more leverage but not so much inverse in the few years of the rally," said Wang. "However, the valuation shifted at the higher water mark and this sentiment may come back for inverse products later in 2018."

However, Wang believes the market will be pushed forward as investors seek to participate on the underlying market sentiment and an increased interest towards principal protected structures since the Fed raised the interest rates three more times this year. "In the next six to twelve months, there couldn't be a better time for the equity markets," said Wang. "Should there be any correction coming into the market, then we would see a diversification away from this interest only leveraged features. In terms of structured products, we would definitely see more variety being offered with the both the equity reaching the last pace of the rally and the interest rates starting to go up again."

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