Bullish NRI investors drive search for higher yield

Non-residential Indian investors bullish on high-yield strategies and leverage plays in Hong Kong and Singapore as they seek alternatives that can enhance returns

Non-resident Indian investors driving demand for alternatives in Asia

A backdrop of low interest rates and flat equity markets is encouraging professional investors in Asia, particularly non-resident Indian investors (NRIs), towards high-yield dividend strategies, foreign exchange and leverage to boost returns.

"Transparency and liquidity continue to be the prime focus in the high-net-worth space since the Lehman Brothers bankruptcy, and it's hard to sell anything with a maturity of more than 12 to 18 months," says Bryan Henning, head of global research and investments at Barclays in Singapore. "Forex is very much the asset class in vogue and there is a more wary outlook when it comes to equity exposure. Fixed-coupon notes have been popular, usually linked to indexes or a basket of stocks with a knock-in barrier, and these products can generate 10–12%."

Barclays has recently launched coupon notes in Singapore based on high-dividend-paying stocks that offer a 10% coupon. More bullish investors have been using leverage to increase the return to as much as 20%, something that has been popular with NRI investors.

"Structures that arbitrage a variety of market-rate differentials continue to be popular within the NRI segment, which is conversant and comfortable with using leverage to boost returns. We've done a variety of products incorporating foreign currency, cross-currency and interest rate swaps that have generated a 15–25% yield on a leveraged basis," says Henning.

The NRI investors are also favouring structured products linked to US underlyings and investing in volatility through delta 1 or callable structures, according to Angel Wu, regional head of products and solutions Asia for ABN Amro Private Banking in Hong Kong. "They are trying different alternatives in order to enhance yield," she says. "Hong Kong and Singapore private banking investors remain more conservative in the wake of regulatory changes but also because equity markets have not performed well and the uncertain environment. They prefer plain vanilla products such as bonds, certificates of deposit and equity-linked notes."

Structures that arbitrage a variety of market-rate differentials continue to be popular within the NRI segment, which is conversant and comfortable with using leverage to boost returns

While equity-linked notes and products such as twin-win structures and dual-currency investments remain popular in the region, structured deposits are falling out of favour as low interest rates are making it difficult to structure capital-protected products that offer attractive returns without having to make the tenor longer.

"Structured deposits used to be popular but with rates so low we now would have to make the tenor much longer – between five and 10 years – to make the payout attractive. A lot of investors don't want to lock in their money for that long and they know they can go into the market as soon as there are opportunities," says a wealth management banker at a Singapore-based bank.

Interest in relative value strategies, such as long-short strategies across various asset classes, have also become more popular with investors as they seek to hedge their portfolios.

"These strategies can be combined with traditional long-only portfolios in credit and equities with a view to provide a superior risk-return payout," says Anurag Mahesh, head of global investment and key client solutions for Asia-Pacific at Deutsche Bank Private Wealth Management in Singapore. "Clients are also looking at building optionality in their portfolios, buying payer swaptions as a way of hedging their interest rates exposure, for instance, were rates to sell off. Some are also looking at forex to hedge their equity exposures because it is a very liquid asset class that trades around the clock and makes it easy to respond to any news or event in the market-place."