Goldman Sachs saidDrawpokerThe months-long rally in Hong Kong-listed Chinese stocks could soon be boosted by the maturity of South Korean structured paper linked to it.
A 3 per cent increase alone would bring the Hang Seng China Enterprises Index to the key level of 7000, while most of the knock-out levels for South Korean structured products were concentrated at 7000, Goldman's trading desk wrote in a report released on Sunday. Hitting these levels could force traders to cover short positions to hedge more upside risks.
According to the report, about $2.2 billion of such bills will mature in May and June.
It is understood that structured products are complex prepackaged investments whose performance or value is linked to the performance or value of related assets, such as stocks, indices, currencies or a combination of these assets, usually including derivatives. In early 2021, as Hong Kong stocks surged, South Korean banks and brokerages sold billions of dollars worth of products known as equity-related securities (Equity-linked Securities,ELS).
In the current situation, the exposure of ELS product traders is similar to that of buying put options. For buyers, this investment is tantamount to selling put options and obtaining a combination of fixed income from these securities.
The potential scenario proposed by Goldman Sachs is in stark contrast to expectations earlier this year, when it was assumed that the expiration of South Korea's ELS would exacerbate losses on Hong Kong-listed and falling Chinese stocks, which was once described by market participants as the Korean version of the "snowball crisis". So far, the Hang Seng China Enterprises Index has rebounded about 36 per cent from its January low, thanks to a combination of policy support, low valuations and foreign capital inflows.
