Structured Note Buyers Boost Bets on Europe Stocks, Not S&P 500
U.S. investors are increasingly buying structured notes tied to European stocks in preference to domestic equities as the area emerges from recession while the Federal Reserve prepares to slow asset purchases.
Sales of U.S. notes linked to the Euro Stoxx 50 Index (SX5E) climbed to $379.2 million in August and total $2.01 billion for the year, more than seven times the $275.8 million issued through the same period in 2012. The volume of securities tied to the Standard & Poor’s 500 Index, while still the highest for any linked asset, has declined 20 percent to $5.99 billion.
Investors are looking to Europe as the euro-area economy ended its longest recession last quarter and sovereign defaults are less likely. European Central Bank President Mario Draghi said on Sept. 5 that monetary policy will remain accommodative for “as long as necessary.”
“For a period of time the U.S. was viewed as a safe haven,” said Mark Freeman, chief investment officer overseeing $15.8 billion at Westwood Holdings Group Inc. (WHG) in Dallas. “As people start to feel better about going back into Europe and other areas, some of that flight-to-safety comes out of the U.S. market.”
Investors see more “relative value” in European stocks as ECB easing supports continental stock markets, Freeman said. Better-than-estimated corporate earnings and monetary stimulus from the Fed helped the S&P 500 Index more than double to a record 1,709.67 on Aug. 2, after touching a 12-year low in 2009.
Fed Chairman Ben S. Bernanke has said the central bank may reduce its monthly purchases if the employment outlook substantially improves and the economy grows in line with forecasts. Higher construction spending and falling jobless claims have sent Treasury yields up and stock prices down.
Goldman Sachs Group Inc. (GS) leads issuers this year with $400.5 million of securities linked to the Euro Stoxx 50 Index, Bloomberg data show. That’s more than 13 times as much as during the same period last year.
HSBC Holdings Plc (HSBA) sold last month’s largest offering tied to the benchmark, $59.6 million of 14-month notes. The securities, issued Aug. 29, yield three times the gains of the gauge, with returns capped at 19.2 percent and all capital at risk, according to a prospectus filed with the U.S. Securities and Exchange Commission. The bank estimated their initial value at 96.8 cents on the dollar. Bank of America Corp. distributed the notes for a 2 percent fee.
A gauge of western European sovereign credit risk fell this year as the ECB continued its easing.
The Markit iTraxx SovX Western Europe Index, a credit-default swaps benchmark that investors use to hedge against losses or to speculate on creditworthiness, dropped about 21 basis points this year to 90.7 at the close of trading yesterday, according to prices compiled by Bloomberg. The measure typically falls as investor confidence improves.
The Euro Stoxx 50 climbed 8.6 percent to 2,863.44 this year at the close of trading yesterday, while the S&P 500 rose 18 percent to 1,689.13.
Tiffany Galvin, a spokeswoman for Goldman Sachs in New York, and Juanita Gutierrez of HSBC in New York, declined to comment.
Banks create structured notes by packaging debt with derivatives to offer customized bets to retail investors while earning fees and raising money. Derivatives are contracts whose value is derived from stocks, bonds, commodities and currencies, or events such as changes in interest rates or the weather.
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