Korean retail traders chase 40% coupons after historic stock rout - report
South Korean retail investors are turning to complex equity-linked securities with high annualized coupons, indicating their appetite for risk has not diminished following last month's significant stock market decline, according to Bloomberg. Sales of these products, known as equity-linked securities or ELS, surged to 3.5 trillion won ($2.5 billion) in July, a record high since April 2023, as reported by the Korea Financial Investment Association.
Demand was driven by notes associated with Samsung Electronics Co. and SK Hynix Inc., two of South Korea's largest publicly traded companies. These ELS products pay out coupons when the underlying stocks or indexes remain within specific ranges, but investors face significant losses if the assets fall below predetermined levels, also known as knock-in levels.
Meritz Securities recently issued an ELS linked to Samsung and SK Hynix offering an annualized yield of 43.4%. In case either stock drops by 70% during the product's term and remains far below its starting level at maturity, investors could lose their principal. Another ELS product offered by Kiwoom Securities Co. linked to SK Hynix and LG Electronics Inc. provides coupons up to 50%, with potential losses ranging from 30% to the entire investment if payout conditions are not met.
The increased interest in these products followed a 22% drop in the Kospi index in July. Regulators have also introduced measures to limit single-stock leveraged exchange-traded funds, which were accused of exacerbating market volatility. While Samsung and SK Hynix shares have recovered to some extent in August, they remain at least 22% below their June record highs.
Starting next month, South Korea's Financial Supervisory Service will strengthen oversight of structured products, requiring brokerages to inform investors when notes approach knock-in levels and review offerings when market risks significantly increase. South Korean investors have previously endured substantial losses on structured notes during the Brexit vote, the 2020 oil price crash, and the 2021-2024 Chinese equity market turmoil.
The issuance of ELS may decrease as market volatility subsides, reducing the option premiums used to fund large coupons.
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