Structured products: a silver lining in the grey clouds of multi-asset portfolios this year
A record year of issuance of structured products
Nick Johal, Head of Solutions
Despite developed market equities not reflecting it, especially at the index level, this year we have experienced several significant events; wars, a (mini) banking crisis, the acquisition of Credit Suisse, the growth of AI and the continued domination of markets by central banks. Structured products, however, have been a silver lining in the relatively grey clouds of multi-asset portfolios.
Global GDP is at 2.8% at the end of 2023* and whilst inflation remains elevated above central bank targets, it has trended down since the summer. Corporate and private sector balance sheets remained healthy as companies termed out their liabilities when rates were much lower. Many forecasts a year ago predicted an impending recession but this has not yet materialised, and the idea of a soft-landing grew in popularity.
The resilience of US consumers and the health of the labour market in 2023 caught many investors by surprise against the backgdrop of the steepest pace of rate rises in our careers.
Indeed, 384bp of global tightening over 2022/23 sharply increased borrowing costs but has not materially depressed asset prices or generated significant stress in credit and funding markets - yet!
It will be interesting to see in 2024 if the ‘long and variable lags’ from the fastest pace of monetary tightening in history come to fruition. Despite the stress experienced in the banking sector in Q1, the VIX has averaged just over 17 this year and at the time of writing has a 12 handle. While we refrain from making predictions or forecasts, this low level of volatility feels unsustainable.
Despite the relatively low equity volatility, the new interest-rate regime has been a strong tailwind for pricing of many structured products this year. Defensive Autocall coupons of 6-7% two years ago are now comfortably above 9%+ and any pick-up in volatility will further improve terms. As a result, we have seen increased volumes in 2023 for a record year of issuance, with structured products performance a bright spot in investor portfolios.
In addition to the standard equity-linked yield enhancement products, there has been an increase in interest and trading of Alternatives with themes such as Dispersion, Hedging and Commodities more prominent as investors seek to diversify portfolios more effectively and benefit from the higher volatility seen in non-equity asset classes. As ever, we strive to work closely with multi-asset investors to help build better portfolios and address the challenges that next year are likely to bring.
Surprisingly, there has been limited issuance of capital protected notes. After all, the last time UK base rates were over 5% (back in January 2008), capital protected structures were a mainstay of the UK structured products market. Given the competition for assets from vanilla fixed income and bank deposits, we believe this market will grow in 2024, particularly if rates remain high for longer.
As we celebrate the 15-year anniversary of Atlantic House this year and reflect on our beginning as a Structured Product house, I’d like to extend my personal thanks for the continued support and wish you all a very prosperous 2024.
*Source: IMF World Economic Outlook as at 04-11-23