Early maturities in South Korean market hit record high in July

Record index performances have led to large numbers of structured products reaching early maturity in South Korea.

A total of 429 products worth more than KRW1.7tr ($1.6bn) knocked-out during July, setting a new record for the year.

The knock out rally was mainly driven by the positive performance of both local and global equity markets as more than 78% of products which matured early this month featured either a single index, a basket of indices or a combination of an index basket and a single share.

Jung Ho Lee, vice-president at Tong Yang Securities told SRP that he expects that large sized capital will continue to flow into the market in August thanks to record levels reached by the main indices, such as the Kospi200, Hang Seng China Enterprises and S&P500.

“Since many local investors earned relatively high returns from knocked-out and matured products, the net capital inflow will increase in size in August,” he said

Slowdown
However, in recent weeks there has been a slowdown of capital inflow despite the positive performance of the equity market, with the South Korean market retaining monthly sales volumes for newly issued products at around KRW3.6tr ($3.5bn) as of the end of July.

“The rollovers have slowed down in mid-July as many investors were doubtful about whether the uptrend of equity markets can be sustainable, and therefore drawn to more defensive investments rather than equity-linked securities (ELSs),” Lee said.

“Looking forward, single shares or share baskets will remain subordinate to the mainstream market due to the risks of knock in being triggered in the volatile market,” he said. “Furthermore, as the investors demand higher returns in this bullish market, foreign and local index linked products featuring the knock out payoff will prevail in the forthcoming month,” Lee concluded.

SRP data
SRP data shows that products which reached early maturity in July returned on average 6.5% p.a. Products linked to the Eurostoxx50, Kospi 200, S&P500 and Hang Seng China Enterprises returned annualized average returns of between 5% to 14%.

According to SRP database, a total of 268 retail products worth of KRW837bn ($815m) knocked-out early in June; 148 products worth of KRW408bn ($397m) in May; 333 products worth KRW1.1tr ($1bn) in April; 300 products worth KRW742bn ($723m) in March; 269 products worth KRW 522bn ($508m) in February and 372 products worth KRW798bn ($777m) in January.

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Early maturities in South Korean market hit record high in July