Koreans Turn to U.S. Shares for Yield as China Stocks Disappoint

Sales of notes linked to equities in the U.S. rose to a record in South Korea last month as disappointing share market performances in China and at home drove investors elsewhere.

Offerings of securities tied to only foreign stocks jumped almost nine fold to 14.1 billion won ($11.9 million) in July, a fraction of the 7.41 trillion won in total equity-linked issuance but one of the few segments of the market that’s growing, Korea Securities Depository data show. All of those securities were linked to U.S. equities.

The Standard and Poor’s 500 Index has remained largely range bound since June 12, when stocks in China reached a peak and began their sharp decline. Korea’s Kospi Index fell 4 percent in June and July. China’s decision Tuesday to devalue its currency has further roiled markets in the region, and triggered the biggest two-day selloff of Asian currencies in four years.

Investors in Korea are switching their attention to the U.S. from China “because of appreciation benefits” from the dollar, according to Gyun Jun, a Seoul-based derivatives analyst at Samsung Securities Co. “The outstanding amount of equity-linked securities tied to the Hang Seng China Enterprises Index is very large now, and the continued fall of China’s stock market has increased fears of knock-in losses from these investments,” he said.

More Diversity

The Hang Seng China Enterprises Index, a measure of Chinese stocks trading in Hong Kong, touched a seven-year high on May 26 and has tumbled 25 percent since. The Shanghai Composite Index is down 23 percent from its June 12 peak and registered its biggest one-day drop since February 2007 last month.

Greater diversity in Korea is a good thing, according to Hong Kong-based David Hansson, the international head of retail structured product sales at JPMorgan Chase & Co.

“In 2015, we’ve seen a clear move from Asian underlying indexes into Euro Stoxx 50, or a combination of Euro Stoxx with variations of developed markets indexes, both in Asia and the U.S.,” he said. “I believe it’s constructive for the market to have a greater diversification across regions and asset classes to avoid potential concentration risks.”

To satisfy increased demand for direct overseas investment, the Korea Exchange said last month it plans to list more structured notes on the bourse that offer exposure to foreign assets.

Korea’s “stock market has been a range-bound market for the past several years, and also, the interest rate is at the lowest ever,” the Korea Exchange said in an Aug. 4 e-mail. “Investors are looking for yields more aggressively and are trying to find the opportunities on overseas investments.”

Before it's here, it's on the Bloomberg Terminal. LEARN MORE