"Investor sentiment in Hong Kong is good, but investors are increasingly cautious," said Johnny Yu (pictured), managing director at UBS in Hong Kong. "This is the second-highest level reached by Hang Seng Index since 2007. It is probably wise for investors to take a step back." Ten years ago, investors looked at the discount offered by A-shares relative to H-shares (those traded in Hong Kong), according to Yu. "Nowadays, rather than focusing on the discrepancy in price, they are more likely to look at the inflows from China into Hong Kong and the stocks that have been purchased," he said.

"Around two years ago, the request from investors for new products prompted fund houses in Hong Kong to introduce leverage and inverse products linked to different indices," said Yu. "However, these products have not taken off and demand remains sluggish." Instead, the new offerings there are in Hong Kong are similar to the daily-leverage certificates (DLCs) recently introduced in Singapore, according to Yu.

"The structures in Hong Kong are slightly different: while the inverse and leverage products have a fund format, these certificates are, in effect, structured products," he said. The products offered in Singapore are different to those in Hong Kong, according to Yu. "Most notably, and unlike the inverse and leverage products, DLCs in Hong Kong have an airbag feature, which is triggered by a significant drop in price," he said.

"Since their launch, these certificates have posted decent turnover, although the amount of assets under management remains relatively small," said Yu. "At October 10, it stood at around S$1m for all 10 products." Yu attributes the modest take-up to a lack of investor familiarity. "But it is also true to say that, in Hong Kong, there is significantly more demand for warrants and CBBCs than there is for inverse and leverage products," he said.

Yu does not expect the imminent arrival of a wave of new money from Chinese investors into warrants, CBBCs and other yield-enhancing products in Hong Kong, which has been predicted by some from the local warrants community. "However, while no structures have been formally presented to the Hong Kong Stock Exchange, there is an ongoing discussion about the introduction of yield-enhancing products," he said.

Even though 2016 was a difficult year for Hong Kong investors, the Hang Seng Index has surged more than 6,000 points to 28,490 this year, according to Yu. Almost half of the gain came from just three stocks - Tencent (+26%), HSBC (+11%) and AIA (+10%). "If you were lucky enough to invest in these three stocks, you would have captured most of the gains in Hong Kong this year," said Yu.

The market dynamics today are different from two years ago, when gains came from the simultaneous rise in the value of blue-chip and penny stocks, while this year the gains were predicated on just a few names within the Hang Seng Index, according to Yu. "Recently, the dynamics have shifted, with China financials showing gains," he said.

Relative to 2016, investors this year have shown a willingness to hold on to warrant positions, with the notional outstanding last month double that of the same period last year, according to Yu.

According to SRP data, for the period between January 1, 2017 and September 30, 2017, the net sales of warrants and CBBCs totaled HK$37.3bn (US$4.8bn), HK$3.9bn for warrants and HK$33.4bn for CBBCs. Interest towards CBBCs was the highest in the first quarter of the year as well as in July, when net sales were close to or slightly above HK$5bn. Contrary to this, sales of warrants picked in May, July and August when they reached HK$731m, HK$840m and HK$703m, respectively.

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