ELS dwindle as Kospi hits a snag

The popularity over equity-linked securities (ELS) is dwindling as its issuance fell for the fourth-straight month largely due to the slipping benchmark Kospi and slow rebound in the local economy affected by Europe’s ailing fiscal conditions, industry sources said yesterday.

According to Tongyang Securities, the issuance of ELS-related products reached 3.13 trillion won ($ 2.77 billion) last month, down 304.1 billion won from June.

In its heyday, the issuance of ELS-related products came to a record 5.52 trillion won in March, the brokerage firm said.

“The decrease in issuance of ELS-related products is unavoidable when coupled with a falling Kospi index,” said Lee Joong-ho, an analyst at Tongyang Securities. “The issuance of ELS-related products goes up usually when investors get advanced redemption of their subscribed ELS products and later reinvest some of the funds into other ELS products.”

Market observers said ELS represented the hottest investment in Korea’s financial market until March this year, when the Kospi entered a recovery phase after it was dealt a severe blow and plunged due to the Greek financial crisis at the end of last year.

Investors began pouring their money into ELS-related products when the market, which at one time sat in the 1800s at the end of last year, began to get back into shape and eventually went over 2,000 in February.

They began moving their assets to ELS-related products after terminating their mutual savings funds, which is deemed more vulnerable to a fluctuating stock market compared to the former.

Things turned upside down when negative economic results from the euro zone hit the Korean Peninsula again in May. Investor sentiment and confidence over ELS-related products wilted and they took a wait-and-see approach and refrained from subscribing to additional ELS products.

“ELS are a product that has basis in the stock market and a plunging stock market naturally hampers investor sentiment toward the financial product,” said a banker surnamed Kim.

ELS were introduced to the local market in 2003 as derivatives offering diverse avenues of profit by investing in single stocks or bonds, a group of stocks or an equity-based index.

They usually mature in three years, but the promised profit rate is often paid out much earlier, within four to six months. The biggest difference between them and equity funds is that ELS are considered safer but also have a maximum profit rate.

A brokerage firm employee surnamed Park confessed his branch barely managed to sell only half of its ELS-products earlier this year when the Kospi was relatively in a good shape.

“Many investors who invested their money into ELS products tend to prefer a secure investment,” Park said. “They are concerned because they failed to get early redemptions they were expecting due to the falling Kospi rate.”

The falling Kospi rate has changed the landscape of ELS issuance. Among ELS-related products issued in July, 48 percent were invested in the local equity-based index, followed by the foreign equity-based index’s 36.7 percent, 12 percent for investing in single stocks or bonds and 3.3 percent for investing in a mixture of stocks and equity-based index.

By Kim Mi-ju [mijukim@joongang.co.kr]