Low interest rates have led South Korean investors to chase yield overseas and UBS is leading the field in responding to this demand with new Europe- and China-linked offerings. Having embarked on a cycle of interest rate cuts three years ago to spur on growth, the Bank of Korea lowered rates four times in less than a year between 2014 and 2015, reacting to continuing macro-economic troubles, with the benchmark rate reduced to a record low of 1.5% in June.
"As South Korean underlyer-based structured products have recently underperformed and generated low yields, we're seeing investors' risk appetite move toward products with foreign underlyings," says Chang Sik Cin, head of Korea structured products at UBS. "A big key is diversifying underlyings and generating yield."
The European Central Bank's latest quantitative easing programme, worth $1.2 trillion, led South Korean investors to look for fixed income-linked alternative investments in the region, while local players also wanted exposure to China's roller-coaster stock markets.
Three years ago, UBS pioneered arranging multi-index underlying autocallable structures, which remain some of the most popular trades in South Korea. The product was introduced at a time when the retail market was suffering from historically low yields and investors were seeking exposure to equity markets in developed countries.
During the past year, UBS's Korea team built on its previous success with Europe-linked products by launching a European convertible bond fund-linked product targeted at both institutional and high-net-worth investors. The bank selected a high-return/low-risk fund, overlaid it with a 4% volatility target strategy and added in strips of two- to five-year annual look-back options. The product, which offers exposure to the second-largest convertible bond market in the world, raised in excess of $170 million.
"More than 70% of structured products traded with foreign banks are linked to foreign underlying assets," says Cin. "Most contain the Hang Seng, S&P 500 and Euro Stoxx. Unless you have these kinds of underlyings to diversify your risk, you are not going to create a positive yield in this phase where South Korean won swaps are trading at all-time lows. You need to be one step ahead of the game and continuously create innovative products to get your clients excited."
In terms of volume among global investment banks, UBS maintained its position as market leader and is the top hedge provider of multi-index underlying autocallable structures in South Korea. The bank has a market share in excess of 13%.
"It is the best house we deal with in terms of its pricing on HSCEI and Euro Stoxx equity-linked underlyings, and for its all-round quality of service," says a South Korean client at one of the country's largest securities houses.
The Chinese stock markets have had a highly volatile 12 months, with the Shanghai Composite Index and Shenzhen Composite Index rocketing to record highs during the second quarter before plunging in the past two months.
The Korea team satisfied the demand among South Korean institutions during the earlier part of the year for access to Chinese stocks with the launch of UBS's China risk-recycling-driven three-month repack notes. The notes incorporated kicker coupons linked to a basket of highly correlated Chinese assets. The notes raised $250 million. Additionally, the bank launched a product last year to capture the narrowing of the discount gap between A- and H-shares ahead of the Shanghai-Hong Kong Stock Connect link that began in November. The product provided an 8% absolute return in a two-month period.
"The strength of our China franchise has given us the ability to lead the way with China innovations in South Korea," says Bilal Al-Ali, Hong Kong-based head of quants and structuring for Asia at UBS. "China's become a big story in South Korea. People love the China story. We saw a lot of vanilla products, bonds being traded, but we sold products like the cash alternative money market fund and a version of our A- and H-share outperformance note. This was a major win to launch that type of product in South Korea."
The bank also provides fund-linked commodity futures and hybrid basket underlying products, offering further yield-enhancement solutions for its clients. The list of product portfolios encompasses index crash put notes, forex-contingent equity index autocallables, thematic baskets of US exchange-traded funds including master limited partnership bond yields and US Treasury yields, and fund-linked products including high-yield bond funds, emerging market bond funds and non-European convertible bond funds.
"We've shown we can break new ground with compelling concepts," Cin adds. "Clients are just yield hungry and they want things that make yield with compelling stories. Europe, convertible bonds and volatility targets are all big targets - with significant effect on yield."
The week on Risk.net, July 7-13, 2018Receive this by email