Canada H1 2023 Review
The structured products market in Canada has proven its stability and adaptability during the first half of 2023, even amidst challenges like soaring interest rates and economic uncertainties. As the specter of a 2023 recession dissipates and inflation remains relatively low, the economy has strengthened, leading to fresh opportunities for structured products. This article examines the market's performance, investor preferences, underlying assets, and payoff distributions, shedding light on the trends shaping Canada's structured product landscape.
Stability Amidst Adversity
Despite the economy's gradual recovery and better-than-predicted GDP growth, high interest rate volatility poses a continuing challenge for investors. Capital protected products have emerged as the favoured choice, witnessing a substantial 2.87% increase in demand during H1 2023 compared to the same period in 2022. Meanwhile, growth and income products have experienced modest declines of 6.5% and 3.5%, respectively. However, GICs continue to dominate the investment landscape, holding the highest market share at 48% during the first half of the year. Furthermore, principal protected notes have been gaining popularity, exhibiting a growth of 3%.
Exploring Payoff Structures
The market share of different payoff structures reveals that cappedProtectedParticipation remains dominant with almost 37%, followed by barrierPhoenix at 24%. Despite the range of structured products available, payoff diversification stands at a relatively low 3%.
Underlying Assets and Sectors
An in-depth analysis of underlying data shows that approximately 24% of structured products are tied to the Solactive Canada Bank 40 AR index. Moreover, 7% are linked to the S&P 500 index, and 4% to the S&P/TSX Banks index. Equity indices serve as the foundation for 69% of the structured products issued in H1 2023, while 17% are based on equity shares. Financial, broad market, and utilities sectors feature prominently in the distribution of these products, with utilities experiencing substantial growth and decrement-linked products witnessing a decrease compared to their 2022 levels.
Investment Trends
Comparing investment trends between H1 2022 and H1 2023, we observe a noteworthy 20% increase in demand for products with the autocall feature. Among these autocallable products issued in Q2 2023, around 36% have a monthly observation, and over 30% have a semi-annual observation. The average knock-in barrier stands at 70.34% in Q2 2023, with an average coupon rate of 9.52% for the same period.
Looking Ahead to H2 2023
The continuing demand for structured products in Canada is attributed to their underlying performance. Notably, the roll-over speed of products expiring/maturing has doubled from 0.60% in Q4 2022 to above 1.2% since the beginning of 2023. This acceleration is driven by expiring autocalls sold in capital at risk notes. Anticipating current market levels, nearly $6 billion of autocall notes are expected to return to the market, representing a 160% increase over the first half of the year. Additionally, there is an extra $6 billion of live notes that could potentially expire if underlyings increase up to 10% from their current levels. Such leverage sets the stage for 2023 to be one of the most promising years for structured products in Canada.
The structured products market in Canada has exhibited remarkable resilience and adaptability amid challenging economic conditions. As the economy strengthens, new opportunities have arisen, and investor preferences have evolved. Capital protected products, utilities-linked products, and autocallables with monthly/semi-annual observations have seen significant growth. With a favourable outlook for the second half of 2023, the future looks promising for structured products in Canada.