After a remarkable start to the year, in which sales volumes have risen by 19%, to KRW49.7 trillion (US$39.7bn), South Korea's investors are gradually turning their attention back to shares, according to SRP data. Products linked to indices accounted for 62% of sales in the first quarter of 2017, although the first half of this year has seen the issuance of share-linked products rise by 50%, to 1,751 products from 1,166 in the same period last year, with overall volumes jumping by 18%, to KRW4.4 trillion ($3.7bn).
"Since the beginning of this year, the number of products issued after 2015 that repaid early has increased, with the issuance of share-linked products increasing as funds are reinvested," said Kim Kyung-Ho, general manager, derivatives solutions and syndication at Mirae Asset Daewoo Securities, the newly merged entity.
The bank "began issuing equity-linked securities based on overseas stocks with the idea of strengthening research on overseas stocks and raising profits", said Choi Hyunho, manager in the wealth management derivatives team. "These alternative products with high coupons based on overseas stock are being issued, although in small amounts for now," said Hyunho, who added that the products are made up of "a combination of stocks recommended by our overseas research team".
Kyung-Ho added, "We are interested in the fourth Industrial Revolution and global stocks listed on the US, Hong Kong and Japanese stock markets." Mirae has issued 15 products linked to stocks from all three markets and features typical autocall features, participation at maturity and capital protection. "The common step-down (autocall) feature defends against some decline, but has a disadvantage when it comes to profit," said Kyung-Ho.
Product examples from the bank include a one-year autocallable (ELS 20891) which offered an annual coupon of 11%, 100% participation at maturity and 90% capital protection and was linked to Nintendo and Tencent Holdings.The note attracted KRW290m ($251,360) of investor cash all eager to make the most of "the correlation between two or three stocks" that Mirae marketed: although the company "selects products with high returns relative to comparative risk among various combinations", the correlation between Nintendo and Tencent over the last six months is 0.949, which puts the two shares as almost perfectly synchronised.
At the end of June, Mirae also produced a one-year equity-linked security (ELS 20898) featuring a combination of worst-of and uncapped calls linked to the shares of Samsung Electronics, Apple and SK Hynix. Since the strike, all three shares have been hovering around their initial level.
Although the issuance of index-linked products remains "overwhelmingly higher than single stocks, we expect an increase in the issuance of stock-linked ELS", according to Kim, although Choi added that "investors are not yet certain enough to invest in stocks because of the huge losses the market suffered last few years on domestic stocks".
Further improvements to the market in South Korea are expected following new proposals suggested by the Financial Services Commission (FSC) in November 2016. The regulator has already delivered on one of its promises announcing the introduction, as of June 26, the promised omnibus account system for foreign investors for derivatives. The account can handle multiple transactions as well as make it easier for foreign investors to participate in the domestic market.
The FSC announcement (in Korean) is available at this link.
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