Equity Structured-Note Demand Signaling Rotation Out of CreditAlastair Marsh
The best start to a year in two decades for stocks and the biggest loss for investment-grade bonds in 14 months is prompting a surge in demand for equity-linked structured notes.
U.S. sales of notes tied to stocks totaled $2.41 billion in January, the most since September when the Standard & Poor’s 500 Index rose to a five-year high, according to data compiled by Bloomberg. Equity-linked securities accounted for 71 percent of the $3.39 billion of structured notes sold last month, up from an average of 64 percent in 2012.
Mounting confidence in the global economy is fueling speculation that the time may be right for a so-called great rotation from bonds into stocks. An unprecedented flood of money into bond funds last year, which helped push yields to record lows, is reversing.
“Most investors are now in risk-on mode, meaning they are increasingly bullish on stocks and are seriously considering the shift from fixed income to equities,” said Alain Alev, head of equity derivative sales for Europe, the Middle East and Africa at HSBC Holdings Plc in London. Demand for equity-linked securities issued by HSBC climbed about 20 percent in January from December, said Alev.
Royal Bank of Scotland Group Plc increased sales of the securities, including reverse convertibles and so-called worst-of basket notes, by between 30 percent and 40 percent during the same period, said Christian Kronseder, senior director of sales and public distribution for Switzerland at the bank in Zurich.
“Our view is that total returns in equities will likely surpass those of corporate credit over the coming years and investors across the spectrum are actively looking for intelligent ways to re-enter the equity markets,” said Shane Edwards, head of equity structuring at UBS AG in London. “The shift is already under way.”
Credit-linked notes accounted for the smallest portion of structured notes sold outside the U.S. in four months in January, according to Bloomberg data that exclude securities where the amount of principal returned can vary. Banks sold $3.69 billion of the securities, or 50 percent of the total, down from 71 percent in December.
Investor enthusiasm for bonds cooled last month with flows into debt funds totaling $21.3 billion, less than two-fifths the $57.8 billion that poured into stock funds, according to EPFR Global data. Last year an unprecedented $493.5 billion flowed into bonds globally.
Investment-grade bonds around the world declined 1.14 percent, the most since November 2011 when they lost 1.9 percent, according to the Bank of America Merrill Lynch Global Corporate Index.