As we approached 2023 at end of last year, the outlook for the structured products industry was mixed. While sales increased by 3% in 2022 due to the Barclays rescission, we anticipated that sales would decrease by 7.57% in 2023, falling just below $100 billion in our forecast to our clients in September.
However, recent market performance has prompted us to revise our estimate. Despite some negative performance, the S&P500 has increased by 8% since September 30th. Taking into account the current live products and an expected increase in the number of products expiring this year, we now estimate sales of $107 billion by the end of the year – a modest 0.6% decrease compared to 2022.
Our estimate suggests that 80% of sales in 2023 will come from a roll-over of notional and interest, while the remaining 20% will be new investment attracted by structured products’ potential for higher returns to try to obtain a positive yield in the face of current high inflation. This estimate takes into account our own methodology (Structured products growth – where does it come from? – White paper published in July 2022).
It’s all about roll-over speed
One factor that will influence the industry’s performance in 2023 is roll-over speed. After a strong growth period in 2021, the number of products expiring early decreased significantly in 2022 due to global events such as the Russian invasion and European energy crisis. The US structured products industry saw a considerable decrease in volume sold, with UBS Wealth experiencing a 27% decrease in volume due to their reliance on autocalls to expire.
However, we’ve seen a slow increase in the volume expiring and maturing between July and last month. Excluding Barclays rescission, the roll-over speed increased from 1.58% to 3.03% in February. March is currently the month with the highest cash flows in autocalls, with almost $5 billion, followed by a stable period of an average of $3.7 billion expiring between May and September, with October and November being the most active months of the year.
While an increase in equity levels could boost sales, several factors such as a potential bear market, an inverted yield curve, the Silicon Valley Bank failure, and Fed interest rate decisions could negatively impact the industry’s performance. Currently, 36% of total live products are linked to the S&P 500, with Nasdaq and Russell 2000 also having significant exposures. The industry’s performance will be heavily dependent on the Fed’s decisions over the coming months.
In summary, the structured products industry faces some headwinds in 2023, but recent market performance and expected roll-over speed increases have led us to revise our sales estimate to $107 billion with potentially increasing to $112 billion if S&P hits 4,100 by April. However, several factors could negatively impact the industry’s performance, and close attention should be paid to Fed
