In spite of a shift towards systematic, rules-based strategies, structured products based on the underlying are absent from Asia Pacific (Apac), according to Emmanuel Triomphe (pictured), head of investment platforms and solutions capital markets distribution at UBS Wealth Management. "If used carefully, these offer many advantages," said Triomphe. "For instance, hedge fund-type of strategies come at a lower cost. Additionally, they allow the execution of investments without any emotions added and take machine-based investing as an example."
The bank does allow its clients access to a variety of structured products, such as "hedge fund related, private equity and long-term themes", according to Triomphe. And the bank has invested heavily in alternative and innovatiions, such as risk premia. "For us, 2018 started even stronger than 2017," he said. "We expect a rotation in terms of appetite. When it comes to sectors, attention will shift from IT to financials. In terms of regions, attention will shift from the US to China and emerging markets."
Given that 70% of the structured products in Asia are yield enhancement over recent months, they compare favourably in flat or moderately rising markets; furthermore, newly rolled out solutions have been well received by investors as they address the current market environment according to Triomphe. "For example, products linked to equity underlyings with a 100% capital return feature and a knock-out level on the upside have been very attractive," said Triomphe.
Investors in Hong Kong are looking for yield enhancement products that suit their views and this is among the major market drivers, according to Triomphe. "Additionally, general liquidity in the market is higher than in other countries and this makes it easier and more cost efficient to hedge derivatives trades, which translates into better economics for investors," he said. "But, also, the sophistication and understanding of structured products is now catching up with institutional investors. For example, private investors now manage structured products within their asset allocation the same way as other asset classes."
And investor confidence is solid, according to Triomphe. "Investors are sitting on healthy profits from the last few years and economic growth in Asia is providing a clear tailwind," he said. "Moreover, they are aware of where we are in the cycle and, hence, request even more tailored solutions to complete their existing long exposure." With range bound markets with higher volatility generally good for structured products, "I would expect volumes to remain solid in 2018," he said.
UBS has issued 1,774 structured products worth US$915m in Apac, according to SRP data. The most popular underlyings include the Hang Seng Index (654 products), Tencent Holdings (166), Hong Kong Exchanges and Clearing (94) and Ping An Insurance China (86). In terms of payoff type, the majority of products are leverage long with stop loss (802 products), leverage short with stop loss (379), and uncapped calls (371. About 66% of all UBS's products in 2018 are wrapped as CBBCs (1,181 products), with the rest warrants (422), registered notes (132) and deferred purchase agreements (20).
Compared to the same period last year, issuance increased by 228% from 544 products, while at the same time net sales went up only 17% from $541m, according to SRP data. In 2017, the bank issued 2,440 products worth $1.8bn.
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