Merrill Lynch is looking to structure principal protected notes on an index of Chinese equities that for the first time will be re-balanced via the constant proportion portfolio insurance method. Principal protected products offer clients a way to tap China's growing market with limited downside risk, explained John Robson, director of structured products in the global equity markets group in Hong Kong. "Many people are interested in China but are worried about the risks," he said.
The notes will be structured on the firm's Merrill Lynch China Dragon Index via the CPPI methodology. Principal is invested in the equity index as well as U.S. government bonds and the exposure to equity is adjusted according to performance. For example, if the index rises in value, the portfolio will be rebalanced with an increased weighting in equities versus the bonds. Robson noted in practice such portfolios would probably be re-balanced once or twice a week. The structures would likely be hedged via over-the-counter equity options, he continued.
"This technique has been around Europe for some time but I don't think anyone's done CPPI-type structures on Chinese underlying [indices]," said a marketer at a rival firm, noting that Merrill could be the first.
Robson added that with slumping equity markets and geopolitical concerns, capital guaranteed products are still proving popular. "We had a lot of success last month," he said, noting the structuring group rang up sales of some USD350 million last month.
