View from the top: the bulls have been vindicated… so far

These results were supported by a stronger performance in both the bank’s markets business and private banking within wealth management & connected (WM&C) in Asia-Pacific.

SRP spoke to Charles Firth (pictured) managing director, Asia Pacific solutions, in Hong Kong, about the recent market turmoil, the particularities of the main markets in the region and the current opportunities around products and trends.

How would you rate the structured products market performance year-to-date on the back of the first quarter results? Have issuance and volumes returned to the market?

Charles Firth: It’s been a very interesting year so far. On the whole, structured products volumes held up in January and February which was a surprise because going into the new year, there was a strong bullish consensus. That feeling changed very quickly when geopolitical issues began emerging (Iran, oil war) and stocks indices began to reverse.

However, US equities remained strong in much of February which created continued appetite for related structured products. Momentum changed dramatically at the beginning of March in the region, but by that time correlation between China and the rest of the world had dropped significantly - and product volumes started to fall. There was an initial retreat from investors in structured products because markets were going down.

We’ve observed that many investors are keen to purchase structured products incorporating bullish views when markets are on an upward trajectory. When markets turn bearish, many such investors tend to prefer to keep the money in their pockets, rather than buying products where investors can profit from expressing bearish views.

Were investors able to capitalise on the different opportunities arising from the market dislocation?

Charles Firth: Those investors who were brave enough to enter the markets in March were able to access what from today’s perspective look like veritable bargains. Other investors chose to wait out the market turbulence, fearing knock-on effects might take some time, perhaps many months, to materialise.

One of our solutions to best suit prevailing investor sentiment is the drop back certificate

The investment view in April and May was uncertain as there was a dichotomy of views about the shape of the market recovery. Some people thought we might be in the middle of a W-shaped recovery, meaning that another large crash similar to March might be imminent, while others were bullish and considered we were in a U or even a V shaped recovery. So far, the bulls have been vindicated.

We saw a gradual pick-up in product volumes in April which further gathered pace in May and is now converging back with ‘normal’ levels of issuance.

What kind of products can deliver value to investors in this environment?

Charles Firth: Structuring products that could fit all those views was really the key challenge and we saw new structures trying to capitalise on the different views. One of our solutions to best suit prevailing investor sentiment is the drop back certificate. This structure puts some of the money - say 40% - on a call option on an underlying and the rest of the money goes into a synthetic cash account paying an elevated interest rate. The call option allows the investor to gain upside if the underlying performs well, while the cash also generates above-market returns. Conversely, every time the underlying goes down by five percent, a portion of the money is taken out of the synthetic account to buy more of the underlying at the cheaper (lower) levels.

The structure resonates well with a lot of investors because they stand to benefit if things go well, while if the underlying went down investors would benefit from increased participation starting from a lower price. Ultimately many investors believe this structure provides the best of both worlds and adds value to their portfolios at a time of significant uncertainty.

Why is the focus on technology higher in the Apac region?

Charles Firth: In recent years, the main Asian markets (Hong Kong, Korea, Singapore, Japan) have become commoditised markets from a product structure point of view - popular structures including equity fixed coupon notes, accumulators, reverse convertibles, autocallables.

In these markets, the sales process revolves around selecting appropriate underlyings within a well-known structure, perhaps themed such as 5G, or geographically themed. Owing to the broader familiarity with these structures, the sales dynamics are driven more by speed to market, and technology enhancements around pricing and valuation. There is a lot of work to do around products governance these days but from a product payoff variety perspective the offering is somehow limited.

This focus on the technology means manufacturers think carefully about scalability. Once processes are fully automated both when facing distributors and also internal processes, there can be increased flexibility to accept smaller ticket sizes, along with more pricing, and generally improved speed to market. Fifteen years ago, most distributors had a one-size-fits-all set up – investors either purchased the product on the shelf or they did not - whereas nowadays distributors are empowered to be more customised and flexible around underlyings and product features with individually tailored offerings and affordable minimum sizes.

It is still possible even if increasingly rare for new product payoffs and new variations to gain more than just a fleeting acceptance

Automation has facilitated pricing around a larger breadth of underlyings quicker, responding to investors’ needs faster and enabled a better management of internal processes. This has also helped to make the life of relationship managers easier as they can communicate faster with us and use the autopricer tools to compare structures and meet the needs of their clients. Ultimately, automation has improved investor choice and increased efficiency.

Is there room for non-standardised products?

Charles Firth: Most product providers are doing some trades which feature payoffs other than the commoditised ones I mentioned earlier, but it depends on what is the ultimate financial objective. There is scope to bring new ideas and reflect new trends, and while these offerings are intellectually interesting it is relatively unusual for them to become a major driver of growth for structured products providers in the region.

It is still possible even if increasingly rare for new product payoffs and new variations to gain more than just a fleeting acceptance. For example, our structuring team developed and introduced the half time autocallable variation in Korea several years ago and that structure became a standard in that market.

What trends do you think will drive activity in the region in the short-term?

Charles Firth: While there is always some room for new products and trends, the scope may be limited. We have seen how major institutions in Europe have adopted ESG and are investing time and money to create frameworks and build up sustainable offerings.

In Asia, ESG seems more in its infancy: we don’t see quite matching level of commitment yet, and ESG considerations seem to have relatively less impact on investment decisions at this point. We do however see more clients seeking to become educated about ESG issues, and we have the capabilities to structure products implementing various ESG ideas. Overall, ESG is in its early stages and it will take some time before we see it become a central investment consideration.

We also provide alpha and beta indices as part of our quantitative indices offering but demand for this type of structure is more common among institutional investors. In particular, when considering more complex products, it is very important for Credit Suisse that the right product types are distributed through the right channels to the right types of investors.

What is your forecast for the remaining of the year?

Charles Firth: There were concerns about a second pandemic wave and what the market impact would be, but so far there is little evidence of the broadly feared double dip and markets continue to recover steadily. Investor confidence has translated into healthy volumes and renewed appetite to continue investing.

One of the benefits of structured products is that they allow investors to swap volatility endemic in underlying assets and convert it into tangible fixed coupons. The headline rate of structured products remains an appealing factor for many investors versus holding those assets directly. Market corrections can provide new opportunities and structured products remain well positioned to extract value from many types of assets. We have a positive outlook for the rest of the year if activity continues at the current levels.