Structured products make a comeback with HNIs

Structured products make a comeback with HNIs
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First Published: Sat, Apr 25 2009. 12 06 AM IST
Updated: Sat, Apr 25 2009. 12 06 AM IST
Mumbai: Structured products are back in favour among India’s rich. Executives at top private banks say high networth individuals (HNIs) have started buying such debentures pegged to the National Stock Exchange’s key index Nifty and other baskets of stocks, in the past few weeks.
Such products are customized to an investor’s ability to take risks and are typically issued by large investment banks to wealthy investors.
Structured products, with embedded options and swaps, typically limit losses by investing in risk-free bonds, but also allow unlimited growth of the principal through exposure to equities. “After the market had dried up, we now see a slow return of investors towards structured products,” says Puneet Matta, head of wealth management at Credit Suisse Securities (India) Pvt. Ltd, the Swiss bank’s local brokerage, which has in the past few weeks issued its own and distributed third-party structured products to clients.
Matta expects a rise in capital allocation to equities “through structured products, in the short- to medium-term”.
Samir Bimal, country head of Amsterdam-based ING Group NV’s private banking operations in India, also sees a rise in demand for these products.
As appetite for equity investments returns, structured products provide a good avenue for wealthy clients to take a measured exposure in the current environment, he said.
Structured products were in big demand from HNIs early in 2008, when equity valuations had peaked. About $700 million (Rs3,500 crore today) worth of structured products were issued in June and July of that year alone. But after the collapse of US investment bank Lehman Brothers Holdings Inc. in mid-September, investors fearing the issuer’s inability to return the principal, started searching for simpler and more transparent options. This virtually shut the market for structured products.
The renewed interest in these pre-packaged products now indicates a return of confidence in the issuers.
“The credit rating of structured note issuers had seen downgrades due to write-downs or losses of (their) US parent(s), which was a concern. But the local entity’s balance sheets are strong with required capital adequacy ratios, which give comfort to clients,” said Yogesh Kalwani, head of advisory at the Indian wealth management unit of French bank BNP Paribas SA, which has distributed structured products to its wealthy clients in recent weeks.
Kalwani pointed out that many notes that were issued earlier, structured for 16- or 18-month periods, had matured recently, and as the capital was protected despite negative returns in 2008, investors gained confidence in them.
About 80% of the structured products issued in the country are pegged to the Nifty index, according to bankers.
The top issuers of these products in India among foreign companies are Citigroup Inc. and Merrill Lynch and Co. Inc.
The top local issuers include Kotak Securities Ltd and Edelweiss Capital Ltd.
Despite the show of confidence, the wealth management industry’s outlook for Asia is grim.
Barclays Capital, the investment banking division of Barclays Bank Plc, in a recent survey of Asia’s leading wealth managers, who among them have at least $5 trillion of assets under management, assessed that “growth in wealth management industry revenues in Asia is expected to soften significantly over the next two years”.
However, the industry’s outlook for India is brighter. “South Asian markets, especially India, have so far fared better than most other emerging markets in containing the adverse impact of the credit crisis,” says a study on Asian wealth management market by Celent, a US-based research and consulting firm.
“The freeze on most investments by clients in the last two quarters of 2008 is slowly changing,” said ING’s Bimal.
Renewed client interest in structured products is in sync with the strong rally in the markets in the past month, said BNP’s Kalwani. Equities have witnessed a strong pullback globally during March.
After declining 52% in 2008, the Bombay Stock Exchange’s benchmark equity index, the Sensex, had till Friday gained at least 36% since 9 March, the highest among emerging markets. The Sensex closed at 11,329.05 points on Friday, gaining 1.74%. Even though a few investment experts such as Anthony Bolton, president of investments at Fidelity International, and Mark Mobius of Templeton Asset Management Ltd see the beginning of another global bull rally, not everybody is convinced.
According to an April report to clients by Morgan Stanley Global Wealth Management , equities are yet to hit a trough. “The fundamental outlook for corporate earnings, home prices and the repair to financial institutions’ balance sheets are not close enough to a trough to be optimistic on equities,” Morgan Stanley’s David Darst and Barbara Reinhard said in an asset allocation strategy report.
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First Published: Sat, Apr 25 2009. 12 06 AM IST