HSBC took the Deal of the Year, USA, award at this year’s SRP Americas Conference in Chicago with its Lookback Trigger PLUS Note which were sold earlier this year via two different tranches.
The UK bank’s submission for the award highlighted how structured products can be used as tools to not only customise the precise risk reward demands of investors but also optimise their forecast for the evolution of the performance of the underlier.
A significant differentiator for HSBC is our breadth of issuance shelves - Jon Neumann
In this instance HSBC collaborated with Morgan Stanley to issue two tranches of the S&P500-linked structure worth US$52m, based on the investment view of Morgan Stanley’s Mike Wilson who was ranked the best portfolio strategist for 2022 in the latest Institutional Investor survey - he was bearish on the performance of the S&P 500 at the beginning of the year but bullish longer term.
The lookback feature provided investors the ability to exploit Mike Wilson’s investment thesis and provide them the confidence to know that not only would they have the downside protection afforded them via the structured note, but they would also benefit from a potentially lower initial level on the note than they were otherwise getting without the lookback feature.
Unlike fixing the initial index level of the underlier on the trade date like a traditional structured product, the lookback feature looks at the historical closing levels of the underlier for a specific time period after the trade date and selects the lowest index closing level during that time period as the initial index level.
According to Jon Neuman (pictured), head of structured products sales, Americas, HSBC, Wilson’s view was right and the lookback feature on both tranches effectively allowed investors to call the bottom in the S&P 500 on 13 March 2023.
The products were launched when the market was showing signs of sluggish performance versus 2022 but since then sales volumes have since increased.
“[This] highlights the resilience and flexibility of structured notes issuance, despite some regional banking market stress events at the beginning of the year, US inflationary pressures and rising interest rates,” said Neumann. “We therefore see investors looking to structured products as a way to manage downside risk exposure and to provide more certainty in their investment portfolios.”
According to Neumann, equity markets have performed well - despite the stress events and uncertainty previously mentioned - driven by the performance of mega cap tech stocks, which is a positive development.
“Additionally, rates have risen quite a bit this year which has driven an increased demand in principal-protected products as the economics have improved,” he said.
HSBC resumed the issuance of equity-linked CDs in the US market again in April 2023 as rising rates have triggered more demand for principal protected products “as the economics have made these types of products more attractive compared to previous years of lower rates” and the regional banking events earlier in the year in the US, have also created new demand for FDIC-insured structured products.
“A significant differentiator for HSBC is our breadth of issuance shelves,” said Neumann, noting that the bank has an FDIC-insured CD shelf, two SEC registered shelves and a Reg S shelf for offshore investors.
“Only a handful of other issuers have this complete offering capability and this can be seen as a differentiating factor for distributors who choose us for their varying client needs,” he said.
According to Neumman, given the increase in rates principal protected product are becoming more attractive as “investors see these as an opportunity to outperform traditional deposit products”.
Going forward, according to Neumann, the consensus is bullish on the prospects for growth in the SP market as product awareness and product education continue to rise.
“We also see multi-issuer technology platforms providing insights to financial advisors on the merits of structured products as well as supporting them with the lifecycle management of the products they’ve sold,” he said. “Advisor awareness and training on the product continues to grow year after year and this has translated to increased volumes sold industrywide.”
As we close out 2023, some of the macroeconomic factors we have seen this year “should continue to play to the strengths of structured products”.
“The defined payout formulas that SPs offer allow investors to shed unwanted risks to the downside via hard or contingent protection and maximise the upside via enhanced participation in rangebound markets or digital payouts in negative markets,” said Neumman.
“[As] a client driven platform we will continue to work closely with our distribution partners creating investment solutions that will help investors navigate market uncertainty.”
In the US retail market the bank’s activity was slower than in previous quarters, however, with issuance dropping from 330 to 287 YoY, according to SRP data. That led to a 14% decrease in sales volume, amounting to US$1.06 billion.