Awaiting the bull’s return

Japan’s equity derivatives executives argue that the potential for growth in those instruments remains, in spite of near-term setbacks. Four bankers talk to JapanRisk about the prospects for these products
Equity derivatives have grown over the past year to be big business in Japan. Many firms launched operations, or expanded existing ones, on the back of hopes that a recovering Japanese economy would lead to a rising stock market. Unfortunately, the second half of 2000 and the first quarter of 2001 are proving to be a great deal bumpier a ride than expected. The Nikkei has continued its downward trend, while mark-to-market accounting rules are making many companies think twice about issuing equity derivatives and investors about buying them.

Paul Frost-Smith, JP Morgan: Expecting more product discrimination and less overall risk appetite
Print entire report

Nevertheless, the four equity derivatives executives that JapanRisk spoke to agree that the second half of 2001 promises much for the sector. A recovery in the stock market is generally projected for the third quarter, which should lead to an overall demand for these products, especially from the retail side. In addition, internet distribution is making equity derivatives much more transparent and accessible. On top of this, it is unlikely that Japanese interest rates will rise much over the coming year, leaving the country’s investors hungry for returns – returns that equity derivatives can help provide.
Below, four executives from prominent equity derivatives operations in Tokyo discuss what they expect from the coming year, and how they are shaping their own businesses.
Last year was a very positive one for the Japanese equity derivatives market. What kind of a year do you think 2001 is shaping up to be?
Hiroshi Wakutsu, managing director and head of equity derivatives sales, Nikko Salomon Smith Barney: Well, if the Japanese market drops, no equity derivatives products will be popular. The markets will probably be quiet through the first quarter of the year. They will be quiet ahead of the year-end results at the end of March – especially so this year because of mark-to-market accounting. But once the market confirms the bottom, people will be very interested in participating in upside, and will be looking for products that will give them a lot of leverage to do so, unlike monetised coupons.
Jim Clark, managing director, head of equities trading, UBS Warburg (Japan): It has been a reasonably slow start to 2001 in Japan, with the Nikkei languishing in the 13,000-14,000 range. However, while we may not have the same market conditions as at the beginning of last year, there will inevitably be various opportunities that will present themselves as the year progresses. There is the potential for an increase in convertible bond issuance, flow and liquidity in the single-stock over-the-counter option market will hopefully increase, and there is potential to see an increase in business from the corporate sector.
Paul Frost-Smith, managing director, JP Morgan: We also think the climate will be more mixed. On the retail side, many investors have become more wary as they have seen stock and index levels slide through strike prices of options they have sold, realising losses. On the other hand, the asset management business is picking up and there is always room for risk management advice to the big institutional equity holders.