UniCredit has increased its market share in Germany by 42.5% year on year although sales which stand at €1.43 billion remain flat. SRP spoke to Dominik Auricht (pictured), head of public distribution sales at the bank, about products, trends and where the German market is going.
Since 2007, the German market has gone back to its roots with simplicity as the starting point for any strategy, says Auricht.
“We see that with the current regulation, where disclosure has become very important - product providers need to be able to explain a product in three pages,” he says.
Although smart beta and volatility control strategies have flooded the structured market over the last few years, these type of products are not getting as much traction in Germany as smart beta and risk control strategies are primarily seen as an institutional product.
“Thematically, they’re not something we see too much of in Germany as retail investors favour certain themes, such as cryptocurrencies, digital assets, cyber security, renewable energy, etc,” says Auricht. “These are usually picked up by the certificates market first before the fund industry reacts.”
As an alternative to smart beta structures, UniCredit rolled out a sector rotation strategy to the Ifo Business Climate Index – a benchmark indicator for economic activity in Germany prepared by the Ifo Institute for Economic Research in Munich.
We have been monitoring the evolution of blockchain and cryptocurrencies for a number of years
“The product has been designed to switch to a more defensive strategy when it reaches a certain point,” says Auricht, adding that the strategy is “very rules-based, tracking the Ifo Index, which tends to act as an early indicator of the German economy”.
As in most structured products markets, blockchain and digitalisation have increased their profile and are driving early activity.
“[These] are certainly areas of potential for this market,” says Auricht. “As a group, we have been monitoring the evolution of blockchain and cryptocurrencies for a number of years.
We’re now seeing stock exchanges launching blockchain operations, with the aim of transacting digital assets by the end of next year. We believe certificates are well-positioned to offer investors access to these markets.
Autocall products continue to be a driver of sales but reverse convertibles have enjoyed a comeback over the past couple of years, according to Auricht.
“[However] with volatility decreasing, it is difficult to offer meaningful products,” he says. “Reverse convertibles are all about underlyings. If the underlying performs, the product performs. The structure is secondary. You need to pick the right underlying at the right time.
“This is what the investor pays for at the end of the day. Most of the structures perform when the market is going up. The timing and product mix are key when building a portfolio.”
According to Auricht, one consequence of the current regulatory environment is that advice has become costly.
“Eighty percent of German certificates investors are conservative and 20% are self-directed,” he says. “On one hand, you have the majority of investors in Germany who are conservative but a considerable sample who are self-directed and look towards more opportunistic products.”
UniCredit, however, has retained its competitive edge by leveraging its expertise and distribution network.
“We are a pan-European bank offering both local and international expertise to its clients,” says Auricht. “When we talk about local expertise, retail networks have become extremely important nowadays because regulation has impacted distribution. If you don’t have a proper distribution channel, you face collapse.”
According to Auricht, this is something new entrants will have to consider when defining their model. “The US banks that have entered the market are competitive and have capital to deploy, but they don’t necessarily have the distribution outlets domestic banks have,” he adds.
The German bank is active in several European structured products markets beyond Italy with Eastern Europe as a focus going forward.
The Czech Republic remains the most developed market, according to Auricht. “Alongside that, we see potential in both Hungary and Poland, the latter of which is gathering increased investment,” he says. “The challenge across markets is of course the negative interest rates environment. Interest rates are like gravity, they have always been there, but now no longer. This is the challenge, to transition to a new market paradigm where capital protected products don’t price without interest rates.”
Despite the regulatory and market challenges UniCredit is looking forward to continue developing its offering and deliver value to investors.
“I wouldn’t say we’re bullish, however the worst is behind us,” says Auricht, adding, “the industry has done an excellent job implementing the regulatory work and has aligned itself to very high standards”.
“We believe that Mifid 3 will make things easier. Structured products have proven to be an area that delivers value to investors. For the industry to thrive, we must continue to educate key stakeholders on this point.”