The issuance of equity-linked securities (ELS) tied to the performance of Japan's Nikkei 225 in Korea has outsripped the issuance of those linked to the Hang Seng China Enterprises Index (HSCEI).
This development is due to the fact that the Japanese stock market has demonstrated a robust upward trend this year, while the Hong Kong market has experienced a sharp decline due to risks affecting China.
An ELS is a high-risk derivative product that derives its investment returns based on the performance of certain equities, such as stock indexes or a group of selected stocks.
According to the Korea Security Depository, Wednesday, the total issuance of ELS based on the Nikkei 225 index was 541.8 billion won ($412 million) at the start of the year. From July onwards, however, there was a significant monthly increase, with the issuance volume reaching 1.419 trillion won and 1.395 trillion won in October and November, respectively.
Meanwhile, the newly issued ELS products tied to the performance of the HSCEI plunged. In November, the issued amount of HSCEI-linked securities stood at 402.3 billion won, accounting for only a quarter of Nikkei-linked securities. The product exhibited a downward trend for consecutive months, recording 513.7 billion won in September and 465.4 billion won in October.
The problem is that the Nikkei 225 index has surged in tandem with the sharp increase in the issuance volume of ELS. Starting the year at 25,716.86, the index had already reached 33,431.51 by November 30. Market watchers cautiously anticipate that the Nikkei 225 has seen its peak.
In this context, there's a high likelihood that the recently issued securities will struggle with early redemption in 3 or 6 months. Such redemption requires the index to have risen or maintained a specified level compared to its value at the time of ELS subscription. Holding products until maturity is risky, as it can lead to principal losses associated with market uncertainties.
For instance, investors who subscribed to the HSCEI-linked ELS in 2021, are now facing large-scale losses worth 3 trillion won during the first half of next year due to the stock market's plunge.
Experts recommend against investing in ELS products during a rising stock market. It can increase investment risks and limit potential profits.
"Most ELS products are issued with maturity of around 2 to 3 years, and entering into a loss bracket doesn't necessarily mean an immediate loss," said Hwang Sei-woon, a senior research fellow at Korea Capital Market Institute. "However, there is a high incidence of products that enter this loss bracket eventually incurring final losses, making it crucial for investors to exercise caution."