A historic stock selloff has driven South Korea's retail investors toward complex structured products as the risk-loving cohort continues to look for ways to boost returns.
Equity-linked securities dangling annualized coupons of 40% to 50% have attracted renewed interest from mom-and-pop traders. Sales rose to more than a three‑year high in July, led by notes tied to Samsung Electronics Co. and SK Hynix Inc.
The boom comes as regulators moved to curb frenzied retail demand for single-stock leveraged exchange-traded funds, which were blamed for amplifying market swings during the benchmark Kospi's 22% plunge last month. This suggests that one of the biggest market routs in recent memory has done little to dampen retail appetite for risk, but just altered the products they choose to pursue.
The recent drawdown appears to have created an attractive entry point for ELS products, which offer coupons as long as the underlying stock or index stays within preset ranges. But the products can carry substantial downside risk when markets fall sharply, as shown by the hefty losses on China-linked notes that were once popular with Korean investors.
“ELS issuance usually rises after a correction or volatility shock, when entry prices look better and coupons increase,” said Maxence Visseau, Dubai-based chief investment officer at Arkevium Capital, a multi-strategy investment firm. “Buyers appear comfortable with Samsung and SK Hynix moving sideways or falling moderately because they believe the shares will avoid a major collapse. The danger is confusing strong companies with safe entry prices.”
About 3.5 trillion won ($2.5 billion) of ELS products were sold in July, the most since April 2023, according to data from the Korea Financial Investment Association.
Meritz Securities Co. earlier this month issued an ELS tied to Samsung and SK Hynix, offering an annualized yield of 43.4%. That comes with equity-like risk: investors can lose their principal if either stock plunges 70% during the life of the note and remains sharply below its starting price when the product matures, according to the terms.
Kiwoom Securities Co. has issued an ELS tied to SK Hynix and LG Electronics Inc., offering annualized coupons of as much as 50%, while disclosing losses between 30% to 100% should the structure fail to meet its payout conditions.
While shares of Samsung and SK Hynix have risen in August, they remain down at least 22% each from the all-time highs seen in June.
The two market heavyweights are preparing record shareholder returns as surging demand for their high-bandwidth memory chips needed to power data centers strengthened their balance sheets. That also likely bolsters the case for ELS linked to their shares.
The structured products have brought trouble for Korean investors on a number of occasions in the past — with the 2016 Brexit surprise, the 2020 oil market slump and the 2021-2024 China stock slump dealing a blow to the market. In 2024, South Korea's financial watchdog said a probe found that some of the country's largest brokers misrepresented risky China-linked structured products to retail investors.
“The key thing is that for any product, you need to disclose the risk involved,” said Patrick Ho, chief investment officer for North Asia at HSBC Private Bank and Premier Wealth. “You want some way to participate in upside and get some protection on the downside.”
Starting next month, the Financial Supervisory Service will tighten the oversight of structured products and require brokerages to warn ELS investors when products approach knock-in levels, and review offerings if market conditions significantly increase risk for investors.
David Elms, head of diversified alternatives at Janus Henderson Group Plc, said he expects ELS issuance to ease as implied volatility declines, reducing the option premiums that allow issuers to offer attractive coupons. The Kospi 200 Volatility Index has nearly halved from the levels seen in late June, but is still at levels more than double the five-year average.
(This story has not been edited by NDTV staff and is auto-generated from a syndicated feed.)
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