September, and following the recent negative equity markets performance, most investors anticipated a Fed announcement that would either lead to a recovery for equity markets or to a bear market. However, since Fed Chair Jay Powell’s announcement that tapering is expected to end around mid-2022, investors seem to have delayed deciding whether recent developments signal the start of a market correction.
As the structured products market will soon see an increase in roll-over volumes, Q4 is on the minds of many structured product holders. This is due to the fact that many call observations still need to take place before the end of year. Using SPi’s current data on outstanding products, we’ve identified a couple of scenarios investors can expect throughout the remainder of the year, discussed below.
The S&P 500 Index remains important, but keep an eye on the Russell 2000 Index
Although 27% of outstanding volume is contractually linked to the S&P 500, there are still plenty of worst of products providing exposure to the worst performing among the S&P 500, the Russell 2000 and the Dow Jones indices. When looking at the performance of all live products, we can conclude that after the S&P 500, most products are currently offering exposure to the Russell 2000 (15%), followed by the Euro Stoxx 50 (8%) and the Dow Jones (6%). As the Russell 2000 provides exposure to small-cap equity performance, a potential market correction could mean a greater impact for linked products than for other live structured products.
A volatility spike will mean better coupons going forward
Since the beginning of year, volatility has been slowly decreasing from the 20-25% range characteristic of 2020, to 15-20% through the end of August. This means that although most autocallsrolled over into new products, most clients had to increase their barrier levels from 65% to 69% in October (thereby taking on more downside risk). As a result, and following the spikes in volatility and the VIX during September, we should expect higher coupons and lower barriers. As the average live structured product is almost 18% above its initial level, we can also expect a continued increase in demand for income products.