Profile: Exane stands up for commodities

Special report: Focus on France

Most market analysts agree that the French market is experiencing a slowdown in the issuance of structured retail products with links to a basket of equity indexes - an underlying that has traditionally been popular with French investors. It seems that investors are now looking for something different, according to Laurent Roussel, Paris-based co-head of derivatives research at equity derivatives research and brokerage company Exane.

"Although the French market is mature, it is still growing," Roussel says. "But due to the relatively buoyant stock market over the past 12 months or so, investors are now more reluctant to invest in equities and equity-linked products. They are looking for products with different underlyings and, of course, they are looking into structured products that can maximise performance."

In fact, commodities are increasingly seen as an important asset class in France for diversification purposes, he says. As a result, commodities are now a key priority for Exane. And 50% of Exane's holding company, Verner Investissements, was acquired by BNP Paribas in 2004. "Because of globalisation, equity markets are synchronized," Roussel says. "Investors are focusing on alternatives to diversify their portfolios."

However, opinions are divided over whether French investors, and private banking investors in particular, are warming to commodities. For example, in a research report published last month, BNP found that emerging market indexes and commodities did not appeal to French private banking investors. Instead, conventional, long-term investments such as mutual funds are still the investment of choice for French investors, BNP says.

Alternatives

Roussel, on the other hand, believes investor appetite has changed as a result of the relatively strong performance of the domestic equity market in recent times, notwithstanding the market correction that occurred in May. "Investors feel ready to increase their investments, so the demand for non-guaranteed products in the market has also increased," he says.

The research team at Exane examines the potential performance of the underlying markets before making a proposal to its clients, which include institutional investors, private banks, retail networks and asset managers. So far this year its research team has a strong emphasis on soft commodities, Roussel says.

"In the private banking sector, there is a demand for alternative underlyings such as commodities, unit trusts and technical concepts such as volatility and dispersion," he adds. In fact, Exane has structured several commodity-linked products for private banking and institutional investors this year.

Exane's tailor-made commodity-linked products are based on indexes from the Goldman Sachs Commodity Index (GSCI) family. For example, the index-linked products range from 100% capital-guaranteed to partially capital-guaranteed. Upon maturity, investors will receive a capped return on the basket of commodities indexes without undertaking any foreign exchange risk.

And such products provide opportunities for investors seeking alternatives to equity investments. Roussel admits that hedge funds remain a difficult asset class to tap because of the stance taken by the French financial watchdog, Autorite des Marches Financiers (AMF), and argues that commodities are equally good for generating alpha. This is because their prices better reflect flows from producers, buyers and arbitragers compared to other types of medium-term investment, he says.

"Some private banking clients have long-term views on commodities but there are some of them who are more opportunistic and want to capitalise on current market conditions for short-term gain," Roussel says, adding that private banking clients have also been looking at other options that can enhance their investments.

It was not until the end of last year that the Committee of European Securities Regulators (CESR) finally confirmed the eligibility of commodity indexes for Undertakings for the Collective Investment of Transferable Securities (Ucits) III products. Prior to the CESR's decision, commodity-linked products were not readily available in the retail market.

Other underlyings that have been popular among institutional and private investors include those that provide exposure to the emerging Chinese equity markets, and Exane has also designed some products that are linked to the Hang Seng China Enterprises Index (HSCEI) and actively managed funds that invest in China's stock markets. Roussel believes the appetite for investments linked to emerging markets is strong, contrary to the findings published by BNP Paribas.