Equity investors in Europe are starting to turn away from long-favored capital-protected notes and accounts--unlike their credit counterparts (see above)--and are buying products with geared exposure to equity indices. Structurers say the past few weeks have seen an uptick in demand for leveraged equity exposure without capital protection, as more and more investors take the view equity markets have turned a corner.
India, China and other emerging-market-linked products are particularly popular right now, but several firms are also pitching structures based on indices closer to home. Firms, including Barclays Capital and The Royal Bank Of Scotland, have been marketing geared FTSE100-linked notes through their private banking arms. The notes can be structured with an embedded option to call the product early, if the FTSE rises by say 30% in the first three years paying out 135% of the growth. This can lure in investors concerned about locking up their cash for a longer period. If there is no early call, the structure continues for another two or three years, with low implied volatility levels and high U.K. interest rates allowing for high participation in the index--anywhere from 150% to up to 200%, depending on whether the final return is averaged over the maturity of the product.
There is a hitch, however, admitted one structured equity salesman. In the structures, there's no exposure to dividend yield. So, investors are taking the bet the leveraged returns will outpace the index plus dividend yield they could get without turning to structured notes. "People right now are bullish enough to just go long the index any way they can," he noted.
While private banking clients and some institutional investors have latched onto these structures, many retail investors are still reticent. Most financial advisors and their clients are still only comfortable with capital protection, so the new structures may stay out of the mainstream until the wider public has the confidence to go long equity without protection, he added.
