Most autocallables products linked to the Eurostoxx 50 sold in in South Africa since the beginning of the year have redeemed early delivering hefty yields. Absa, the most active provider of autocallables saw four products maturing in the first quarter of 2017, with the best performing product, Step Down Euro Stoxx 50 Autocall - Issue 7, delivering a 18.2% return after one year investment.
The product is a five-year growth product denominated in ZAR and linked to the performance of the Eurostoxx 50 index with yearly observations. The product promised to mature early if on any of the annual observation dates the underlying index was above the initial level paying out a coupon of 18.20% per each year elapsed. The product included a 60% downside protection barrier on the underlying's strike level until maturity.
According to Johann Gunter, head of external distribution, retail at Absa Corporate and Investment Bank, the choice of the Eurostoxx 50 index was a recommendation of the bank's internal research.
"When designing investment products and considering underlying indices, we always look to our house view on global equities for guidance," said Gunter. "Barclays research had an overweight bullish outlook on European equities but cautioned that it was not without risk/volatility - which when all is said and done created a perfect pricing environment for autocalls."
South African investors seem to be more open to capital at risk products and autocallable products as suggested by SRP data. The knock out payoff represents 17% of the total volume sold year-to-date compared with 13% in 2016.
"Uptake in conditional capital protected / capital at risk products is becoming more prevalent," said Gunter. "I believe the main reason for this is the muted outlook on our local equity market and uncertainty around return expectations for global equity markets."
Autocalls are becoming an attractive alternative or addition to a traditional long only equity portfolio, according to Gunter.
Another trend getting momentum in the South African market is the use of foreign currencies in structured products. Out of the four products matured YTD, three were issued in USD, giving an average return of 8% compared with 18% provided by products denominated in the local currency. The reason behind these products seems to be the consensus view that the South African Rand will depreciate against major currencies like the USD, EUR and GBP in the medium to long term. Taking that into account, the South African investor is willing to have a lower return in exchange of holding another currency.
According to Gunter, Absa has been proactive in rolling-over their clients and, as long as the house view on European equities remain bullish, they will offer products linked to the Eurostoxx 50 index.
"We expect this trend [growing outstanding volume] to continue for the foreseeable future," said Gunter. "[The] main drivers are the relatively low interest rates making cash an unattractive investment, uncertainty around returns on local equity markets, continued local political uncertainty making ZAR bases investing less attractive and investors becoming more educated and better informed about the potential benefits of structured products."
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