Structured products issuance reaches $389 million for week as optimism around tax bill sparks rally

By Emma Trincal

New York, Dec. 20 – Structured products issuance was reasonably strong in the week ended Friday, the second of the month, with agents pricing $389 million in 112 deals, according to preliminary data compiled by Prospect News. Notional was about 4% lower than the previous week, but figures get revised upward on a week-to-week basis due to lags between pricing and filing dates.

Decent week

The action was not bad given that it was still mid-month and that the holiday season with its distractions is well underway, sources said.

The stock market rallied ahead of a major tax overhaul making its way toward a final vote, which probably helped demand for equity exposure via structured notes.

U.S. equity benchmarks hit new record highs last week. More growth is expected from the new tax cuts, which fueled a year-end rally. The S&P 500 index rose nearly 1% for the week and the Dow Jones industrial average was up 1.3%.

Stock-picking strategy

One disappointment however was the unusually small size of two of the Bank of Montreal trades linked to Raymond James basket of stocks for the next year. Those deals, which are repeat trades, tend to be extremely large, rarely below the $100 million mark.

Bank of Montreal issues two tranches each 12-month period, one in December and the other, a month later in January, both based on Raymond James’ best picks for the year starting with the second deal. Those deals, which reflect investors’ appetite for high-quality stock-picking, hit $250 million a year ago in December, followed by $310 million in January.

Bank of Montreal’s $310 million notes linked to Raymond James Analysts’ Best Picks for 2017 was by far this year’s top deal in size.

Best Picks smaller

But last week’s first December tranche was less impressive.

Bank of Montreal priced on Tuesday a total of $72 million of one-year notes tied to the performance of a basket of equally weighted stocks selected as Raymond James Analysts’ Best Picks for 2018. It came in two separate deals, one of $44.7 million for commission-based accounts; another for fee-based accounts at $27.2 million.

“This is really strange. It’s a fraction of what they normally do. I am as mystified as anybody else,” a market participant said.

“Why were people not as hungry as last year? It’s not for underperforming or lack of performance, I don’t think.

“There aren’t that many research-driven strategies out there. I guess you’d have to compare this with a similar investment class, like [unit investment trusts.] How did those guys do this year? The First Trust and the Guggenheim guys?

“Let’s see what happens in January.”

Raymond James Best Picks has a strong reputation as a top stock-picking franchise on the merit of its track record. From 2007 through 2016, the list has averaged a return of 7.3% over the S&P 500, according to the firm’s website.

A quick look at each stock comprising the Best Picks for 2017 however showed it underperformed the S&P 500 index by over 10%.

Strong year

The year is ending on a very strong note for the structured product market.

There is a lot to cheer about with volume up 31.6% this year through Dec. 15 to $47.50 billion from $36.10 billion last year, according to the data.

“Obviously the stock market laid the groundwork this year for a phenomenal comeback in this investment class,” said the market participant.

“Brexit last year had a bad impact on volume. But with the Dow Jones setting over 70 record highs this year, a lot of investors are looking for alternative ways to get exposure to the market.”

Now what?

Some are not as optimistic for next year.

“Now that the tax bill is about to be signed by the president, I don’t see stocks getting double-digit returns next year,” a sellsider said.

“Remember the saying: buy the rumor, sell the news...

“Multiples are already high. I don’t foresee any crash. But with interest rates set to rise three more times next year, multiples will increase even more.”

He was referring to stocks ‘price-earnings ratios, which are a function of growth and discount rates.

If rates rise, P/Es will become even richer next year, he explained.

“Stronger P/Es end up being unattractive. It’s a sign to sell. People will switch to bonds.”

Inflation is still subdued, he added, which will put some pressure on growth.

“For the moment I don’t see any inflation because of the technical environment. People when they shop can compare prices on seven, eight, 10 different products on their phone. Retailers have no price power.

“And the same goes with employees. Those who lost their job in 2008 are cautious to ask for raises despite the low unemployment rate,” he said.

This sellsider said that he does not expect double-digit gains in the equity markets next year.

Premium sauce

“What we need is a bit more volatility,” the sellsider said.

Higher levels of volatility give more pricing power to traders structuring coupons and buffers as options pay higher premium.

“There is always an opportunity somewhere with structured products. People always find new ways to sell notes. But at some point you run out of ideas when pricing conditions aren’t there.

“Higher volatility will save the traders and bring new ideas.

“But it may frighten investors. You always have that double-edged sword,” he said.

Top agent

The top deal last week after Bank of Montreal’s two offerings on Raymond James picks came from Morgan Stanley.

Morgan Stanley Finance LLC priced $19 million of four-year buffered digital notes linked to the Euro Stoxx 50 index. Investors will receive a 55.8% digital payout if the index finishes above negative 10%. Otherwise they will lose 1.11% for each 1% that the index declines beyond 10%.

Morgan Stanley was the top agent last week with 13 deals totaling $113 million, or nearly 30% of the volume.

It was followed by UBS with $82 million and by Raymond James, the distributor of the Bank of Montreal’s Best Pick deals, for $72 million.

“Obviously the stock market laid the groundwork this year for a phenomenal comeback in this investment class.” – A market participant, commenting on structured products issuance

“What we need is a bit more volatility.” – A sellsider

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