Structured product sales in Brazil stall despite soaring returns

Sales of structured products in Brazil, Latin America's second-biggest market after Mexico, have taken a dive in 2017, according to SRP data, with an aggregated US$395m sold, down from just under $2.3bn for the same period of last year, according to SRP estimates.

In a market where the average term of products is less than one year, the slide in sales has seen the outstanding volume of structured products in the country to just under $2.6bn as of August 25, 2017, down from the recent peak of $3.1bn as at the end of 2016, despite a 54% drop in maturing volumes to $933m.

The slump has been most evident in inflation- and hybrid-linked sales, like the IPCA + Double No Touch - 17 March 2017 and IPCA Participacao Alta, which have virtually vanished from the market in 2017, generating a combined total of just $14m, as compared with over $1bn over the same period last year. However, the Brazilian market also saw the launch of the first credit- and real estate-linked structured products this decade earlier this year, with and XP Investimentos' Capital Protegido - iShares iBoxx $ High Yield Corporate Bond ETF and Capital Protegido - iShares U.S. Real Estate ETF series, respectively.

The two new lines have helped propel XP Investimentos to the top of the distributors' ranks in 2017, with an estimated aggregate of $186m in sales, according to SRP data. In sharp contrast, Itau's volumes have slumped, alongside those of Santander and Citi.

Notably, Citi won the Structured Fund Deal of the Year at the SRP 6th Americas Awards 2017 with CitiFirst Capital Protegido IX, a dual-directional structured fund, which sold US$110m in Brazil in the last quarter of 2016. The 18-month, capital-protected fund is linked to the local equity index, Ibovespa and promised to pay a minimum fixed coupon of 7.5% at maturity with an additional potential return related to the absolute return of the index, as long as the underlying index did not trade outside a +25%/-25% range over the investment term. There have been two occasions when the product achieved a potential coupon of close to 20%, with the last being days before the news regarding the launch of an investigation against Brazilian President Michel Temer.

A coupon of 20% on an 18-month product would be close to the sales-weighted average annualised return for products that have matured in Brazil so far in 2017, according to SRP data.

While SRP data shows a slowdown in activity in the Brazilian market this year, Citi maintains a bullish outlook on the country. Brazil appears firmly engaged in the first phase of a virtuous cycle in which policy success, adjustment to earlier shocks to the system, and the bottoming of the business cycle combine to set up a phase of falling interest rates, rising confidence, rising activity, and rising earnings, according to Nicholas Parcharidis, managing director, co-head of Americas at Citi Private Client Solutions.

Picture credit: wallpapercave.com.

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