In 2003 retail investors discovered an appetite for EuroMTNs, and great progress was made — especially in the equity-linked market. Jonathan Sibun reports.
Retail investors came to the structured EuroMTN market in force last year and in doing so changed the traditional pattern of institutional investor supremacy. In the search for yield they bought particularly heavily into the interest rate market. This was principally a result of the exodus from the equity markets but also driven by a change in retail behaviour.
Investors in Europe have become increasingly powerful and sophisticated over the past few years. Historically, retail money has been institutionalised, going through an intermediary such as a fund manager, but that is changing. Retail investors now have better direct access to fixed income products because banks are paying them more attention.
“There is a definite move away from what the situation has always been in the MTN market, which is institutional,” says Gavin Eddy, head of EuroMTNs at UBS in London.
“It will be interesting to see how the retail market holds up after the dollar structured product slows down — whether they continue to be active, just moving elsewhere in the EuroMTN market. What we’ve seen in the dollar structured market has been pretty unique and it would be nice to see that the retail bid will just shift into other products. But that’s yet to be determined.”
One such product is the equity-linked note, a structure about which bankers are increasingly upbeat because of the rise in the equity markets.
Not that there would have to be much of an increase in equity-linked issuance to turn heads. “There is no doubt we’ll see more equity-linked activity, but you have to take that from a level where you’ve seen near to nothing for the last 12 months,” says Chris Cox, head of EuroMTNs at Citigroup in London.
However, though the equity-linked market had a tough year, it was not completely barren. Rupert Lewis, a EuroMTN trader at BNP Paribas in London, says the market is still viable. “Last year we did some of the largest notes ever in the equity-linked sector,” he says. “Including self-led deals we did over Eu7bn of equity-linked product last year.”
There is potential for further growth in the market. In fact, many dealers expect the equity-linked sector to be the star performer of 2004.
“The enquiry we’re seeing is getting larger and the equity market is great because investors don’t just buy double and triple-A names, but single-As as well,” says Frair Appleby-Walker, a EuroMTN trader at BNP Paribas. “You’ll see more and more single-A credits try to get into that market because of the cost savings they can make there.”
Kentaro Kiso, head of EuroMTNs at JP Morgan in London, is similarly upbeat about the equity-linked market in 2004. He says the typical retail time horizon of two to three years is suited to that market in particular.
“The equity-linked product is a great fit and I wouldn’t rule out the chance of a major slowdown in the multi-callable rates product at the expense of equity product,” he says.
But there are certain investors who are not able to take equity-linked product and can only take interest rate or credit-linked structures. Therefore houses that will prosper will be the ones that are able to offer the full portfolio of products.
However, one fear for the EuroMTN market is that if interest rates rise and the stock markets perform well, retail money will not just flow from the interest rate market into the equity-linked market, but transfer out of fixed income altogether.
“I think we’ll see more money going into equities this year from a retail perspective and less into fixed income and that is a worry for us,” says Cox at Citigroup. “Over the last two years, growth in retail distribution has been our largest growth sector. If retail steps out then you have to fill that void and find somewhere else to go with your deals.”
Bankers fear that the shift in allocation seen in recent years from equity to fixed income could start to reverse in 2004 as sentiment in the equity market improves.
Andrew Devenport, head of EuroMTNs at Goldman Sachs in London, agrees that a strong equity market could erode the structured note market.
“When the buyers of interest rate product — which have tended recently to be mostly high net worth individuals — stop buying those structures, our view is that they’ll just start buying equities,” he says. “There isn’t much of a halfway house where they will buy hybrid equity-linked notes. After all, these are people who are used to buying shares.”
Equity on the Rise in 2003
If the equity market does perform strongly, especially in the US where the competition of dollar structured product versus equity is highest, it is unlikely that investors will pass up what they will see as a free ride.
The fact that 2004 is a presidential election year and President Bush will be doing as much as he can to rev up the economy makes this all the more likely.
But not everyone foresees a stampede back into equity. “If you look at the advice that a lot of the retail banks have been given, they’re still going to have their portfolios in a cross-section of products,” says Appleby-Walker at BNP Paribas. But it is difficult to shake off the feeling that the market may be returning to its status quo.
Having become an increasingly important bidder of structured paper last year, the retail buyer base looks likely to return to former practices, hastening the resumption of the traditional buyside dynamics in the EuroMTN market.
“Institutional investors are going to become a more important component of the EuroMTN market in 2004, at the expense of retail, which will be less important,” confirms Devenport at Goldman Sachs.