Sales of Structured Products Tell Us a Lot About the Global Search for Yield
What can this year's sales of structured products tell us about investors' mindsets?
A lot, according to the flows and liquidity team at JPMorgan Chase.
Annual sales of retail structured products are expected to reach their highest level for seven years, according to analysts led by Nikolaos Panigirtzoglou. Global sales of retail structured products reached $466 billion in the first 10 months of the year, on track to reach $560 billion by the time the curtains are drawn on 2015, driven mostly by demand from Asia.
While the world's collective search for yield has sparked a rise in total sales of structured products, it has, conversely, also led to a relative decline in the safest such products that come with the smallest returns for investors. The portion of structured products boasting full capital protection, which are generally favored by risk-averse investors, has fallen to a fresh all-time low level of 33 percent of total structured product sales.
As the JPMorgan analysts note (rather dryly): "The sharp fall in the universe of structured products with 100 percent capital protection is likely a reflection of the still low level of interest rates, which effectively makes the purchase of zero coupon bonds for capital protection purposes a lot more expensive. It is almost impossible for issuers to currently offer both 100 percent capital protection and a decent yield or upside."
In the meantime, sales of reverse convertible bonds — which can be converted to shares at the discretion of the issuer — are also said to be booming. Investors in such notes generally receive a higher coupon to compensate them for bearing both the credit risk of the issuer plus downside risk in the equity, but don't get any extra benefit if the shares rise.
"The strong demand for reverse convertibles is reflective of the high appetite by retail investors for stable and high coupons and/or their doubt of the upside potential of the equity market," the JPMorgan Chase analysts conclude.