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BNPP WM eyes equity-linked structured products for 2020, arguing ‘there’s no alternative’

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Fixed income came to the forefront as the most favoured asset class for Asia’s private banking industry in 2019, even with the outperformance of equities. BNP Paribas Wealth Management expects this trend to shift in 2020 as most of the bank’s featured strategies currently appear be to stock-linked, Asian Private Banker understands.

“We emphasise to clients that ‘there’s no alternative’ as we see limited room for the bond market to rerate further from here — which makes a strong case for investors to switch back into equities,” Gabriel Chan, head of investment services, Hong Kong at BNP Paribas Wealth Management told Asian Private Banker.

“Among featured products for the first quarter of 2020, most of them are equity related. At the same time, we emphasise the importance of investing in quality companies.”

Delta one notes on China A-shares

Chan said although A-shares are becoming an increasingly important asset class for global investors, most clients with limited knowledge still underinvest in the market.

To capture the untapped opportunities, the bank has worked with a third party index provider and has created a delta-one note based on the index to look at the companies in China which have been paying an increasing amount of dividend over time. The underlying index — a market cap weighted index consisting of 160 stocks — considers both Hong Kong and China listed A shares, Asian Private Banker understands.

“A delta-one note could be a better wrapper to execute these evergreen strategies compared to an ETF, on the back of a lower expand ratio while maintaining trading flexibility similar to an ETF,” he commented.

“Over the past five years, more Chinese companies have managed to establish a good dividend track record, and as the stock connect pool expands, presenting more bright spots for dividend enhancing-type index strategies to automatically and progressively increase weighting into China A-shares.”

Dispersion warrants on US equities

Another featured strategy that is on the bank’s product shelf is dispersion warrants, which are set to perform as long as the underlying basket of stocks act differently within a certain period.

“No one has a crystal ball about the US election, but by looking at Trump’s administration’s policy stance, you will notice that certain sectors should benefit more than others,” Chan said. “For example, financial and tech companies would benefit more should Trump be re-elected. On the other hand if Democrats win, the market may have a correction and some defensive sectors like consumer staples and utilities may perform better.”

The bank created a basket of 10 stocks from different sectors which are expected to perform differently over an 18 months horizon.

Non-directional structural products overall have started to become popular among private banks last year as investors were less confident about taking directional bets.

In a previous interview, Audra Seah, head of investment advisory and capital markets at DBS Private Bank, pointed out that as a question mark still hangs over the sustainability of the equity recovery, one-way directional trades could be risky in the rising volatility investment environment.

“We try to complement our clients’ portfolios by steering them towards more market-neutral equity structures, instead of a pure beta play,” she said, offering an example of outperformance structured products which are baskets of stocks which the bank believes will outperform other baskets of equities or indices.

“We have done a number of trades around the ESG theme. Take for example our ESG MSCI Asia outperformance structured products, which were designed such that relative outperformance of the MSCI ESG Index compared to the MSCI Asia Index determines the payout of the warrant or note. The larger the outperformance, the higher the payoff,” she explained.

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