No Room to Fall Further, Reviving ELS Investment Appeal

Possibility of Further Sharp Decline Low
Brokerages Offer Coupon Yields Exceeding 20%

View of the National Assembly and the financial district from IFC Mall. Photo by Mun Ho-nam munonam@

[Asia Economy Reporter Minji Lee] As the perception that global stock markets have fallen as much as they can expands, an analysis suggests that the investment appeal of ELS (Equity-Linked Securities) has increased. This is because securities firms are offering high coupon yields due to weakened investor sentiment toward ELS, and the possibility of further sharp declines in indices is considered limited.

On the 6th, Hi Investment & Securities announced that it is recruiting for the index-type ‘HI ELS 3058’, which offers a maximum return of 21% (7% per annum). It is a 3-year maturity, early redemption type ELS with early redemption every six months, based on the KOSPI 200, Hong Kong Hang Seng Index (HSI), and Euro Stoxx 50 indices. If the early redemption conditions are met or if none of the underlying assets fall below 50% by the maturity evaluation date, the offered coupon yield will be paid. Korea Investment & Securities will finalize subscriptions for the 3-year maturity ELS ‘TRUE ELS 15249’, which offers an annual return of 21.51%, on the 8th. This is a stock-type ELS based on the US electric vehicle company Tesla, with early redemption starting after four months.

Recently, the coupon yields of ELS issued by securities firms have exceeded 10% and even 20%, regardless of whether they are index-type or stock-type. Due to the plunge in underlying assets, principal repayment of ELS has not been smooth, causing investor sentiment to freeze sharply. As a strategy to attract investors, high-yield coupons are being offered.

However, since the beginning of the year, global indices such as KOSPI (-22%), Euro Stoxx 50 (-22%), and S&P 500 (-20%) have been sharply declining, and some stocks like Tesla (-41%) and Netflix (-68%) have not found a rebound point, leading to a continuous decrease in ELS issuance volume. The issuance volume of ELS in the second quarter is about 8.7 trillion won, significantly down from 9.3 trillion won in the first quarter.

Although the recovery of investor sentiment toward ELS seems distant, securities experts have a different view from investors. They believe it is a time to pay attention to ELS. The main reason is that the possibility of further declines in indices is low. Currently issued ELS use the current index and stock prices as reference points, and since they reflect interest rate hikes, wars, and supply chain issues, it is difficult to enter the knock-in zone where investment losses could occur. For example, if the knock-in zone for an ELS based on the KOSPI 200 is 50%, the KOSPI, currently around 2300 points, would have to fall below 1300 points.

Researcher Jeong In-ji of Yuanta Securities said, "From experience, when early redemption is delayed and the outstanding issuance balance accumulates significantly, stock prices tend to form a bottom, and now is exactly such a time," adding, "Since the underlying assets have fallen, the reference price has lowered and coupon yields have increased, making it more attractive for investment."

This content was produced with the assistance of AI translation services.