The growing number of houses throwing money and resources into the Hong Kong structured retail market has resulted in a steep decline in margins, and some firms are anticipating a shakeout next year. The Hong Kong structured equity market, which saw around USD5 billion of issuance last year, has been a global hot spot for structured products for several years. But equity market officials say it is no longer home to sizeable volumes and chunky margins--margins for a typical structure this year have dropped to 1.2-1.5% from 2.5% last year.
A senior equity derivatives marketer said the number of houses offering retail products under their own branding has jumped from seven or eight last year to around 13, with such houses as Bear Stearns and Barclays Capital (DW, 8/19) now entering the fray. The additional competition is forcing firms to cut their target issuance size by as much as half, as well as pressuring margins. "It's becoming very crowded," said an equity head at a bulge bracket house adding, "We'll probably see some fallout next year." He explained that to remain competitive firms need to differentiate products as well as spend large amounts on advertising.
"In our case pricing and product features need to become more and more attractive or else there is a margin squeeze," noted an official at ABN AMRO. Equity officials also noted that while interest remains high in Hong Kong, the size of the pie could also shrink next year given expectations of further rate hikes which may drive some investors back into safer money market instruments.
