Hong Kong ELS investor losses skyrocket

Buyers of troubled equity-linked securities (ELS) tied to the performance of the Hang Seng China Enterprises Index (HSCEI) protest in front of the Financial Supervisory Service headquarters in Yeouido, Seoul, Jan. 19. Yonhap

Losses from equity-linked securities (ELS) tied to the performance of the Hang Seng China Enterprises Index (HSCEI) sold by Korea's top five commercial lenders have almost reached 230 billion won ($171 million) for this year, market watchers said Sunday. The high-risk, high-volatility index encompasses 50 shares of Chinese firms traded outside mainland China.

More investors will incur losses in the coming months as the three-year securities mature, compounded further by the index plunging 11.12 percent since the beginning of the year. The HSCEI was among the few global benchmark indexes that recorded double-digit year-to-date declines.

Losses are certain unless the current 5,000 level gains at least 60 percent of the previous peak of over 12,200, reached in the first half of 2021.

Experts say the index will not see a meaningful rebound due to the sluggish Chinese stock market, hamstrung by the drawn-out U.S.-China trade feud, China's slowdown, lack of stimulus packages encompassing fiscal spending and monetary easing, as well as sustained capital outflows from China.

Figures 

The country’s top five banks — KB Kookmin, Shinhan, Woori, Hana and NongHyup — have registered a combined loss of 229.6 billion won between Jan. 8 and 19.

Only 257.5 billion won of about 435.3 billion won that reached maturity in the 11-day period was redeemed, raising the loss rate to 52.8 percent.

The outstanding ELS balance total stood at 19.3 trillion won as of Nov. 11 last year. About 15.9 trillion won of that was sold by banks.

Of the 19.3 trillion won, 15.4 trillion, or 79.6 percent of the total, will reach maturity this year. A total of 3.9 trillion won in the first quarter will come due followed by 6.3 trillion won in the second quarter.

The duration of the index's poor performance is unusual compared to other global market developments, according to Samsung Securities researcher Jeon Jong-kyu.

“Stock index adjustment cycles since the 1980s in Korea, the U.S. and Japan have lasted no more than three years. The HSCEI index stagnating for four years is extremely rare.”

Hi Investment & Securities researcher Park Sang-hyun said the index will not be able to find a breakthrough.

“The index will remain sluggish unless Chinese authorities put in place policies to spur the economy and reinvigorate the stock market,” Park said.

The gains from ELS products are determined by underlying assets. Investors are able to redeem the securities every six months. If the valuation of underlying assets falls below a certain level, investors incur losses to their principal.

The index soared to a peak of over 12,220 in February 2021, when most of the products were sold. The figure then fell to 8,000 at the end of last year before dipping further to 5,100 this year.