Speakers at a Deutsche Bank conference on structured products last month predicted Europe will see a continuing shift in the balance towards capital protected growth products and away from income products.Kim Gayer, head of structured and investment products sales Europe, said there will also be more business on a wider array of underlyings, including correlation products, emerging market indices, hedge funds and managed funds. While equity-linked products will continue to dominate, there will also be more hybrid products, linked for example, to a basket of equities, fixed income and commodities.

More products will be CPPI-based, he said, and there will be more pensions wrapped products.

The conference, held in Milan to an international audience of DB’s clients, demonstrated the speed with which the sector has become an established part of the product armoury. For example, Roy Thompson from Deutsche Private Bank said that structured products had grown from nothing to 25% of its revenue in the past six years.

Outside of the very plain vanilla products, head of exotic structuring Stephane Junod said the most popular structures are individually-capped basket products, and ‘best of’ (‘rainbow’) products. Early knockouts are still popular, and there is some demand for the ‘best of’ concept applied to a set of options, for example one, two and three year options, on the same underlying.

Europe
France’s massive market has seen a move to unit-linked products with BNP’s Cappuccino range selling in excess of €2.5bn over nine issues.

Italy on the other hand has suffered following regulatory scrutiny after the sale of some complex and ‘misleading’ products; on the positive side, however income products continue to be sold via insurance companies – linked to indices rather than shares as in the past – and banks have sold some China and India-linked products.

Spain’s handful of providers have been successful in moving investors out of cash deposits, and into capital-protected structures, particularly hybrid, correlation or basket-based products.

The three Benelux markets have distinct demand patterns, said Gayer. Luxembourg is similar to the Swiss private banking market, Holland has developed a taste for hedge fund-linked products, and Belgium’s mature market is a niche for income product sales.

In German speaking Europe, Austria is in the early stages of development, whereas Germany is only three or four years old but has developed sufficiently to sell a lot of CPPI products, as well as income products with variable income.

Finally, in the far north of the continent, Scandinavian investors generally want growth products, though have ventured as far afield as China and India recently in their choice of underlyings.

Asia
China is not only important as a linked asset. The Asian markets, including China itself, are growing rapidly, often driven by regulatory changes. In China eight fund managers have taken advantage of the new Qualified Financial Institutional Investor and Qualified Domestic Institutional Investor regime to raise a total of $7bn under management in joint ventures with local firms, and a dozen banks recently gained derivatives products licences.

There has been one open-ended capital-protected fund on the Chinese market, though structured with zeros and shares, rather than options, and one simple CPPI product.

In the highly-developed Hong Kong market, Ken Sue, head of structured and investment products sales Asia, suggested that assets raised since 2000 are between two and three times the Investment Funds Association estimate of $7bn. Note-based products are popular, with credit-linked, as well as equity linked underlyings. Hedge fund-linked products are also being sold to retail, albeit it with low volumes.

Sue estimates that Singaporean investors put $5bn into capital protected products last year. Korea and Taiwan are also active. An estimated $25bn of product has been sold in Korea to date, while Taiwan is a very competitive market, in which fund managers, life companies and banks are all active issuers.

The Americas
The world’s biggest investment market buys very little packaged product, though there have been some sales of equity-linked deposits and insurance products sold to retail.

Andrea Minetti, head of structured and investment products sales Americas, noted that there are retail structured products listed on Amex and Nasdaq, where equity-linked notes totalled $5.6bn in 2003, up 100% year on year.

The number of exotic products also rose from 6 issues in 2002 to 35 last year. This year has seen the trend continue.