FxWirePro: Flows in Structure products in 2016 hit all-time low amid global slowdown in Q4 that lures zero coupons

The global demand for structured products declines sharply in 2016 led by FX related products.

Global sales of retail structured products reached $330bn so far this year, globally tracking an annualized pace of $378bn.

This is the lowest pace in more than 10 years. The above diagrammatic representation demonstrates the breakup by regions and asset class. All regions and asset classes showed a contraction vs. last year.

The majority of this year’s decline was driven by Asian investors, where sales fell by 50% or $194bn (see above exhibit). The decline was driven by FX and Equity products, where sales fell by 70% and 42% respectively (see above figure).

Korea and Japan led the decline driven by new regulations curbing the sales of structured products by Korean brokerage firms, and by the sharp appreciation of the yen which hampered the sales of FX related products in Japan and Asia more broadly.

US sales of structured products also saw a big decline, especially in equity related products. By contrast, Europe outperformed with only 9% decline in sales.

This year’s big decline in bond yields (at least up until August) had been an additional factor hampering sales of structured products. Even lower levels of yields up until August, and depressed rate volatility by historical standards, made structured products less attractive for high net worth individuals that were previously buying these products for yield enhancement or to monetize volatility risk premia.

The share of structured products with at least 100% of capital protected as a percentage of total sales has declined further to a new all-time low level of 31% (see above figure).

The sharp fall in the universe of structured products with 100% capital protection is likely a reflection of the still low level of interest rates, which effectively makes the purchase of zero coupon bonds for capital protection purposes a lot more expensive.

It is almost impossible for issuers to currently offer both 100% capital protection and a decent yield or upside.