The equity-linked securities (ELS) market, which enjoyed great popularity among Korean investors, is slowing down. The size of ELS issuance in September nearly halved from this year’s record high.
The amount of ELS issuance, including equity-linked bonds (ELBs), came to 5.18 trillion won (US$4.30 billion) in September, according to the data from the Korea Securities Depository (KSD) on Oct. 1. The figure was only half of the 10.11 trillion won (US$8.40 billion) posted in April when the issuance hit a record high this year. Some industry analysts said that the market shifted to a downturn in August when the size of ELS issuance stood at 5.03 trillion won (US$4.18 billion), down 35.2 percent from 7.76 trillion won (US$6.45 billion) a month ago.
ELS products had been very popular this year as investors who could not find good investment products continued to pile into the products due to the prolonged period of low interest rates and the bearish stock market. The size of the ELS market also grew as the amount of advanced redemption increased early this year, leading to the rising demand of reinvestment.
However, the situation has reversed as the DLS debacle occurred. Investors have become reluctant to invest in derivatives products after DLS products linked to Germany’s interest rate on government bonds made huge losses. In addition, banks are very careful in recommending the products to their customers as they are criticized for "incomplete selling," a practice in which banks sell financial products to customers without fully informing them of the products' risks.
A lower rate of return is also one of the reasons why investors have lost the interest in the products. Generally, ELS products have been categorized into medium risk and medium profit investment products as they have provided 6 to 7 percent of earnings rate a year. However, the rate of return on the products which were recently launched mostly remains at 3 to 4 percent. The earnings rate has significantly dropped as the money market rate suffered a huge fall and the range of fluctuationin the stock market which is the underlying asset decreased.
Accordingly, money is flowing out of ELF which have combined a great number of ELS products. As of Sept. 30, 478 domestic ELF products lost a total of 323.30 billion won (US$269.04 million) of capital over the past month and 430.50 billion won (US$358.15 million) over the past three months, according to Seoul-based market tracker FnGuide. These are a huge capital outflow considering the fact that the net inflow of money into the products stood at 81.50 billion won (US$67.69 million) early this year and 110 billion won (US$91.49 million) in the past year. The amount of funds set up is on the decrease as investors express concerns over derivatives and sellers are reluctant to sell the products.
Industry watchers say that it will not take long for the ELS market to pick up. KB Securities Co. said the issuance of ELS decreased 37.42 percent in the second half of 2015 when the products made a large-scale loss compared to the first half and it took about 16 months for the market to pick up.