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BNP Paribas Equity and Derivative Strategy (EDS) believes the US dollar strength should
weigh further on emerging currencies and equities, especially Asian. But 2015 might
witness one more round of easing by the BoK, PBoC, BoJ and ECB as the global economic
situation deteriorates and deflation pressure escalates. Given the low crude oil prices, we
believe there is a higher probability of the BoJ effecting additional QQE to achieve its 2%
FY2015 inflation target for Japan. The ensuing currency war should drive up Asian equities
and risky assets one more time in 2015 and this might be the last round of the world
reflation trade. Equity markets with attractive valuations, like Korea and China, should
benefit from this reflation in 2015. This catalyst is likely to be accompanied by reforms in
Asia and an Asia corporate governance improvement theme. Investors bullishness being
excessively high, price actions have been extreme recently; we believe the first quarter of
2015 should offer better entry levels.
The report explores:
The US Dollar Asset Bubble
Chinese Equities in 2015 A Reflation Story
Korean Equities in 2015 The Year of The Catalyst
Japan Reflation vs. Stagflation Risk
Risk Parameters Corner: Systematic Asia Smiles Strategy and Volatility Arbitrage
Please see the important notice on the inside back cover
Winner Lee
Asia Equity and Derivative Strategist
+852 2108 5658
winner.lee@asia.bnpparibas.com
Guillaume Derville
Head, Asia Equity and Derivative Strategy
+852 2108 1055
guillaume.derville@asia.bnpparibas.com
Shun Maruyama
Japan Chief Equity Strategist
+81 3 6377 2252
shun.maruyama@asia.bnpparibas.com
Shuai Chen
Asia Equity and Derivative Analyst
+852 2108 5638
shuai.chen@asia.bnpparibas.com
NOT F or
TABLE OF CONTENTS
6
18
26
32
34
38
40
50
Upside exposure
52
55
68
72
77
77
80
83
92
Contacts
94
Important Notice
97
Asia Equity Derivatives Strategy: Guillaume Derville, Winner Lee, Shun Maruyama, Shuai Chen
Flow Sales: Hong Kong: (852) 2108 5639, Singapore: (65) 6210 1883
NOT F or
4Q14 LEGACY
The Bank of Japans additional qualitative and quantitative easing (QQE) on 31 October,
came earlier than expected, giving the market a positive shock. Volatilities spiked along
with panic buying by foreign fast and real money investors; the following week saw
record volumes. The Japanese indices term structure turned downward sloping and we
witnessed volatility arbitragers entering term structure plays (selling short-dated and
buying long-dated volatilities). Investors sold short- to medium-term calls ahead of the
snap election in early December as the NKY Index was trading at around 18,000 (EDS
2014 Index target). As a result of the additional QQE, EDS Asias strong USD and
weak JPY story worked well in 4Q. Since our 4Q14 strategy report The Tipping Point,
published on 9 October, the JPY currency weakened from 107.8 to a seven-year low of
121.5 on 5 December against the USD.
In China, the Shanghai-Hong Kong Stock Connect Program (Through Train) has been
the main story since April. Since its launch on 17 November, market volumes have been
disappointing (especially on the Southbound). Getting close to the connection, the A/H
premium almost narrowed to parity; arbitragers who bought A shares and sold H shares
gradually locked profits. As investors expected a quiet year-end, the long-awaited broadbased China easing measures were finally implemented: the PBoC cut lending and
saving deposit rates. As Chinas economic growth remained under pressure, targeted
measures were deemed not effective enough and expectation of further policy stimulus
would be needed, domestic retail investor sentiment reversed and equity purchase
activities started. Shanghai A-shares index, rich in financials, rallied over 30% and was
supported by massive market volumes. The Hang Seng China AH Premium Index
peaked at 132.4 on 7 January 2015.
The US dollar strength was a key market driver in the fourth quarter. Other notable
events were the collapse of oil and commodity prices, caused by a Russian currency
crisis and the ruble plunged by 44% in 2H14. CNY and Asian currencies (ADXY index)
have remained relatively resilient so far.
In 2015, Chinese equities should be driven by the top-down reflation macro story. BNP
Paribas China Chief Economist, Xingdong Chen, expects two more interest rate cuts in
2Q and 3Q 2015 (25bp each for deposits and lending) and 2-3 cuts in RRR (50bp each).
After fighting corruption and consolidating power in the past two years, President Xi
Jinping and policy makers are likely to focus on growth stimulation. In the coming years,
Asia Equity Derivatives Strategy: Guillaume Derville, Winner Lee, Shun Maruyama, Shuai Chen
Flow Sales: Hong Kong: (852) 2108 5639, Singapore: (65) 6210 1883
NOT F or
banking sector reforms, RMB internationalization and the opening up of Chinas capital
account will be on Xi Jinpings agenda. EDS Asia remains long-term positive on A shares
and forecasts the SHCOMP Index to reach 3,500 in 2015. Besides, we target the HSCEI
to reach 12,600 and the HSI 27,620. Chinese banks and insurers will benefit from the
monetary easing cycle.
BNP Paribas EDS Asia reiterates its bullish stance on Korea, as 1) regional and GEM
funds are now massively underweight on Korea, 2) Korean equity valuations remain
comfortably low compared to the Asia ex-Japan universe, 3) the Korean government
encourages corporates to enhance profitability and increase dividends, 4) the NPS
(AUM: KRW458t as of September 2014) intends to increase domestic equity allocation,
and 5) potential large corporate restructuring.
Fundamentals and
corporate governance
improvement are needed to
sustainably push Japanese
equities further.
Given the BoJs potential additional QQE to ensure its 2% FY2015 inflation target, we
estimate the NKY Index might test JPY19,000; this represents a 12.5% upside from
current levels.
HIDDEN ASSETS
In the recent collapse of EM currencies and commodities, Asian currencies and equities
remained relatively resilient. Asian skews remain cheap as a result of the extended
demand on structured product activities, while local events drove investor bullishness in
the fourth quarter. HSCEIs extraordinarily low skews have been driven by upside
volatility demand as investors turned bullish on Chinese equities. NKY index volatilities
and skews have been trending higher as investors took profits ahead of the snap
election.
Skew discrepancies between Developed Markets (DM) and Asian indices are reaching
new highs as developed world indices skews remain elevated. Within DMs, DAX and
SX5E indices belong to the high volatility universe, while SPX and AS51 indices are
enjoying relatively low volatility. Risk parameters, especially skew discrepancies, are
offering directional trade opportunities as we believe Asian equity markets should
outperform US equities in 2015
Asia Equity Derivatives Strategy: Guillaume Derville, Winner Lee, Shun Maruyama, Shuai Chen
Flow Sales: Hong Kong: (852) 2108 5639, Singapore: (65) 6210 1883
NOT F or
Buy Mar-15 103/110% Call Spread on HSCEI at 2.07% and/or Buy Mar-15 105% Call on H-FIN at 3.8%
Buy Mar-15 105% Worst-of-Call on Chinese Banks (CCB [939 HK], ICBC [1398 HK] and BOC [3988 HK]) at 2.5% (34.8%
discount to the cheapest individual call on ICBC at 3.84%, implied correlation offer at 93%)
Buy High Yield A-shares Basket and/or Buy China Properties Basket
Buy Jun-15 105/115% Outperformance Call Spread on HSCEI ETF (2828 HK) over A50 Tracker (2823 HK) at 3.35%
Buy Jun-15 105% Timer Outperformance Call on HSCEI ETF (2828 HK) over A50 Tracker (2823 HK) at 3.55% [with Vol
budget at 17%]
Buy Chinese Banks & Insurers (or Buy H-FIN) and Short Chinese Brokers
Sell Mar-15 110% Call and Buy 90% Put on HSCEI receives 0.33%
Buy Jun-16 Call on Dispersion on Japanese and Korean Exporters Basket, 30% strike, at 2.7%
Buy Mar-15 17,500-19,000 Call Spread on NKY Index at 366.5 index-point (~2.15%, spot ref: 17,040)
Sell Mar-15 105% Call and buy 95% Put on NKY at 0.17%
Buy Mar-15 95/85% Put Spread on NKY at 1.62%
Buy Dec-17 NKY ATM Put Quanto USD, and Sell Dec-17 NKY 96% Put in JPY
Buy Mar-15 105/120% Outperformance Call HSCEI over AS51 condition on HSCEI return >0 at 2.7% [implied correlation bid at
20%], without condition at 3%
Buy Mar-15 95/85% AS51 Put Spread at 1.15% and sell Mar-15 95/85% HSCEI Put Spread at 2.01%
Buy Mar-15 95% Best-of Put on AS51-TWSE-HSI at 0.53%, AS51-TWSE-NKY at 0.52%, AS51-TWSE-Kospi2 at 0.42%
Buy Feb-15 95% Put on Nifty Index at 85bp and/or Buy Feb-15 95/85% Put Spread on Nifty Index at 75bp
Buy every month a 3M 100/104 call spread on Asian Index Basket and sell a 3M 100/104 call spread on SPX Index with 0%
floor overall payoff offered at 4.4%
Buy Basket of Dec-16 80% Put on Asian Indices [NKY, HSCEI and Kospi2] and Sell Basket of Dec-16 80% Put on Global
Indices [SPX, AS51] at 0.04 vol-pt difference
Asia Equity Derivatives Strategy: Guillaume Derville, Winner Lee, Shun Maruyama, Shuai Chen
Flow Sales: Hong Kong: (852) 2108 5639, Singapore: (65) 6210 1883
NOT F or
7.0
6.0
16.0
5.0
4.0
12.0
3.0
8.0
2.0
1.0
2006 2007 2008 2009 2010 2011 2012 2013 2014 2015
Sources: Bloomberg, BNP Paribas; data as of 2 January 2015
4.0
00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15
Sources: Bloomberg, BNP Paribas; data as of 2 January 2015
Asia Equity Derivatives Strategy: Guillaume Derville, Winner Lee, Shun Maruyama, Shuai Chen
Flow Sales: Hong Kong: (852) 2108 5639, Singapore: (65) 6210 1883
NOT F or
Chinese banks have transformed themselves from credit asset holders to traders via
the fast development of asset-backed securities (ABS) and diversified risk/leverage
to non-bank financials,
2.
they have lower balance sheet risk after rate cuts, following the introduction of local
government debt regulation and the acceleration of NPL write-offs/disposals,
3.
the risk-free rate has been lowered, given government efforts to gradually remove its
implicit guarantee on trusts and WMPs,
4.
LDR relaxation and potential RRR cuts are easing NIM pressure, and
5.
share incentive schemes are improving bank productivity, leading to better ROEs.
Judy thinks Chinese banks current valuations imply NPL for FY15 at 21.2% of Chinas
FY15 GDP. We believe it is overly pessimistic.
China Banks-Dec14.pdf: http://www.bnppresearch.com?E=dehcfkbgff
EDS Asia expects to see further reforms progress for state-owned banks in 2015, and
we believe the recent sector-wide re-rating has removed key roadblocks for the reforms.
Key upcoming reforms for the banking sector include 1) employee equity offerings
programme, 2) introduction of private strategic investors, and 3) asset restructuring.
These measures would help banks source additional funding to strengthen their core
tier-1 capital, align bank employee incentives better, improve overall asset quality, and
ultimately boost operating efficiency.
Chinese banks - consensus valuations and BNP Paribas target prices
Code
Nam e
Mkt Cap
(HKD b)
Chinese Banks
939 HK CCB
1398 HK ICBC
998 HK China Citic Bank
3988 HK BOC
3328 HK BoComm
1988 HK Minsheng Bank
1288 HK ABC
3968 HK CM Bank
Sector Average
1,621
2,173
405
1,464
576
422
1,552
509
8,722
6.43
5.71
6.11
4.41
7.03
9.97
4.02
18.86
5.6
5.8
5.5
5.9
6.4
5.8
5.6
6.6
5.8
5.2
5.5
5.2
5.5
6.1
5.5
5.3
6.0
5.5
EPS
Grow th
y-y%
6.2%
4.9%
6.8%
7.9%
4.8%
5.8%
7.4%
10.0%
6.5%
PB (x) DY (%)
1.0
1.1
0.9
0.9
0.9
1.1
1.0
1.2
1.0
6.3
5.9
5.1
5.8
4.6
3.1
6.2
4.3
5.7
Asia Equity Derivatives Strategy: Guillaume Derville, Winner Lee, Shun Maruyama, Shuai Chen
Flow Sales: Hong Kong: (852) 2108 5639, Singapore: (65) 6210 1883
BNPP
rating
BUY
BUY
BUY
BUY
BUY
BUY
BUY
HOLD
Target Upside
Price
(%)
(HKD)
8.00
7.00
7.10
4.92
8.00
10.80
4.03
18.14
24.4%
22.6%
16.2%
11.6%
13.8%
8.3%
0.2%
-3.8%
14.0%
NOT F or
200
Jan-13
Jul-13
Jan-14
CRCB
400
ABC
600
ICBC
800
CCB
1,000
Minsheng
1,200
3Q14
90.0%
80.0%
70.0%
60.0%
50.0%
40.0%
30.0%
20.0%
10.0%
0.0%
CEB
50
40
30
20
10
0
(10)
(20)
(30)
(40)
(50)
Citic
y-y% (RHS)
CMB
1,400
(y-y %)
BOC
BoCom
(Rmb b)
Jul-14
(%)
China 10-year Bond Yield
5.0
13.0
4.5
11.0
9.0
4.0
7.0
3.5
5.0
3.0
3.0
2.5
2007 2008 2009 2010 2011 2012 2013 2014 2015
1.0
2012
2013
2014
Asia Equity Derivatives Strategy: Guillaume Derville, Winner Lee, Shun Maruyama, Shuai Chen
Flow Sales: Hong Kong: (852) 2108 5639, Singapore: (65) 6210 1883
2015
NOT F or
(%)
35
7.20
7.03 7.03
7.00
26
25
6.85
6.82
31
30
6.97
6.99
6.80
6.60
6.75
6.63 6.67
20
6.58
15
13
13
6.40
10
6.20
6.12
6.00
Jan-14
Apr-14
Jul-14
Oct-14
7.5
5
7.3
5
0
Feb-14
May-14
Aug-14
Asia Equity Derivatives Strategy: Guillaume Derville, Winner Lee, Shun Maruyama, Shuai Chen
Flow Sales: Hong Kong: (852) 2108 5639, Singapore: (65) 6210 1883
Nov-14
NOT F or
8.5
(y-y %)
115
8.0
95
3Q15:
1Q15:
interest rate interest rate
cut by 25 bpts cut by 25 bpts
7.5
7.0
75
55
6.5
6.0
Resid. sales vol.:
From -9% y-y in Nov 2014
to 0% y-y by 4Q15
5.5
5.0
4.5
15
0
(5)
(25)
Jan-06
Apr-06
Jul-06
Oct-06
Jan-07
Apr-07
Jul-07
Oct-07
Jan-08
Apr-08
Jul-08
Oct-08
Jan-09
Apr-09
Jul-09
Oct-09
Jan-10
Apr-10
Jul-10
Oct-10
Jan-11
Apr-11
Jul-11
Oct-11
Jan-12
Apr-12
Jul-12
Oct-12
Jan-13
Apr-13
Jul-13
Oct-13
Jan-14
Apr-14
Jul-14
Oct-14
Jan-15
Apr-15
Jul-15
Oct-15
4.0
35
Two symmetric interest rate cuts of 25bp each in 2Q15 and 3Q15, on both deposit and
lending rates
RRRs cut
1) Relax HPR for high-end properties. 2) relax HPR for non-city centres projects
Business tax
If holding period < 2 years (previously 5 years), then it is 5.5% of the sales amount. If the
holding period >2 years, it would be exempt from business tax.
Capital gains tax
Less than 20% of the capital gain from selling the property (vs. 20% previously)
BNP Paribas China Properties Consensus valuations and BNPP target prices
Code
Nam e
Chinese Properties
2777 HK
Guangzhou R&F
1813 HK
KWG Property
813 HK
Shimao Property
688 HK
China Overseas Land
2007 HK
Country Garden
960 HK
Longfor Group
Sector Average
Mkt Cap
(HKD b)
Last
(HKD)
PE (x)
FY15
PB (x)
DY (%)
BNPP
rating
Target
Price (HKD)
Upside (%)
33.4
17.1
67.0
209.7
69.2
65.6
10.28
5.83
18.92
25.25
3.38
11.18
4.3
3.9
5.4
7.9
4.7
6.4
5.4
0.8
0.7
1.2
1.8
1.0
1.2
1.1
6.2
6.5
5.0
2.1
6.7
2.8
4.9
BUY
BUY
BUY
BUY
BUY
BUY
13.9
7.5
22.0
26.7
3.5
11.2
34.8%
28.6%
16.1%
5.5%
3.3%
-0.3%
14.7%
Asia Equity Derivatives Strategy: Guillaume Derville, Winner Lee, Shun Maruyama, Shuai Chen
Flow Sales: Hong Kong: (852) 2108 5639, Singapore: (65) 6210 1883
NOT F or
(Index)
3200
100000
3000
80000
60000
40000
20000
0
Jan-14
Jul-14
40.0
35.0
30.0
25.0
2600
20.0
2400
15.0
2200
10.0
Oct-14
Shenzhen A - PE
HSCEI - PE
45.0
2800
2000
Apr-14
Shanghai A - PE
(x)
3600
3400
120000
5.0
2006 2007 2008 2009 2010 2011 2012 2013 2014 2015
Sources: Bloomberg; BNP Paribas; data as of 6 January 2015
800.0
700.0
600.0
500.0
400.0
300.0
200.0
2013
2014
100.0
24-Apr-13
24-Oct-13
China A shares (a proxy play FTSE China A50 XIN9I Index) rallied 54.1% and
outperformed the HSCEI by 30.9% since the rate cuts. The Hang Seng China AH
Premium (HSAHP) surged to a peak of 132.4 on 7 January 2015, implying A shares on
average traded at 32.4% premium over their corresponding H shares (a sharp reversal
from its low of 88.97 on 23 July).
Investors accumulated China A-share ETFs:
11
24-Apr-14
Asia Equity Derivatives Strategy: Guillaume Derville, Winner Lee, Shun Maruyama, Shuai Chen
Flow Sales: Hong Kong: (852) 2108 5639, Singapore: (65) 6210 1883
24-Oct-14
NOT F or
Foreign investors started to participate in the recent A-shares rally via the FTSE China
A50 Index Futures, listed in Singapore. The December futures contracts had been active
since the rates cut and the average traded volume shot up by 47.6 times (to 323k
contracts between 24 November and 31 December, from 6.8k contracts in the first three
weeks of November).
BNP Paribas is ready to underwrite structured products on Shanghai A shares (via Stock
Connect). We selected 50 very liquid stocks on the Shanghai Stock Exchange to serve
hedging purposes better. In the starting stage, only simple products, such as Certificate
Plus, Fixed Coupon Note and ELN, will be considered. Since short sell is prohibited in
China, traders can only buy delta to hedge, thus, the OTC option activity is likely to be a
one-way flow in the initial stage.
A-shares outperforming; HSAHP surged to 132.8
(Index)
135
130
125
120
115
110
105
100
95
90
85
2012
2822 HK AUM
90
80
70
60
50
40
2013
2014
2015
6%
2823 HK AUM
(HKD b)
100
30
17-Jul-14
17-Sep-14
17-Nov-14
Volume (LHS)
Open Interest (RHS)
4%
500000
500
2%
400000
400
300000
300
200000
200
100000
100
0%
-2%
-4%
-6%
-8%
17-Jul-14
17-Sep-14
17-Nov-14
0
8-Oct-14
0
17-Nov-14
12
17-Dec-14
Asia Equity Derivatives Strategy: Guillaume Derville, Winner Lee, Shun Maruyama, Shuai Chen
Flow Sales: Hong Kong: (852) 2108 5639, Singapore: (65) 6210 1883
NOT F or
Southbound position
(Rmb b)
18.0
16.0
14.0
12.0
10.0
8.0
6.0
4.0
2.0
0.0
17-Nov-14
30%
25%
20%
15%
10%
5%
0%
1-Dec-14
15-Dec-14
29-Dec-14
6.0%
5.0%
4.0%
3.0%
2.0%
1.0%
0.0%
1-Dec-14
15-Dec-14
29-Dec-14
13
7.0%
Asia Equity Derivatives Strategy: Guillaume Derville, Winner Lee, Shun Maruyama, Shuai Chen
Flow Sales: Hong Kong: (852) 2108 5639, Singapore: (65) 6210 1883
NOT F or
(HKD)
1600
HSCEI Bloomberg Estimated EPS (RHS)
40.0%
1400
35.0%
HSCEI (LHS)
23000
21000
19000
17000
15000
13000
11000
9000
7000
5000
3000
(x)
25
20
30.0%
1200
25.0%
1000
20.0%
15
15.0%
800
600
400
05
06
07
08
09
10
11
12
13
14
10
10.0%
5.0%
0.0%
-5.0%
0
05
06
07
08
09
10
11
12
13 14E
2015 PE (x)
HSCEI
Level
Upside /
Probability
dow nside
(%)
(%)
HSI Level
Upside /
Probability
dow nside
(%)
(%)
Current
7.61
11,991
Current
10.20
23,485
Low
6.00
9,450
-21.2%
10%
Low
9.00
20,715
-11.8%
10%
Base
8.00
12,600
5.1%
60%
Base
12.00
27,620
17.6%
60%
High
8.50
13,388
11.7%
30%
High
12.50
28,771
22.5%
30%
4.4%
100%
Expected return
16.1%
100%
Expected return
6.5%
14
14.2%
Asia Equity Derivatives Strategy: Guillaume Derville, Winner Lee, Shun Maruyama, Shuai Chen
Flow Sales: Hong Kong: (852) 2108 5639, Singapore: (65) 6210 1883
NOT F or
HSCEI - FY15 PE
Low case 6x PE
Base case 8x PE
High case 8.5x PE
(x)
10.0
9.0
HSI FY15 PE
Low case 9x PE
Base case 12x PE
High case 12.5x PE
(x)
14.0
13.0
12.0
8.0
11.0
7.0
10.0
9.0
6.0
8.0
5.0
2011
2012
2013
2014
2015
7.0
2011
17000
16000
15000
14000
13000
12000
11000
10000
9000
8000
Jan-10
2013
2014
2015
2012
HSCEI
Consensus Bottom-up Index Target
70.0%
60.0%
50.0%
40.0%
30.0%
20.0%
mean
10.0%
0.0%
Jan-11
Jan-12
Jan-13
-10.0%
Jan-10
Jan-14
Jan-11
Jan-12
Jan-13
Jan-14
USDCNY
6.30
8.5
6.25
8.0
USDCNY
6.20
7.5
6.15
7.0
6.10
6.5
6.05
6.00
Jan-13
Jul-13
Jan-14
Jul-14
15
Jan-15
6.0
2006 2007 2008 2009 2010 2011 2012 2013 2014 2015
Sources: Bloomberg; BNP Paribas; data as of 7 January 2015
Asia Equity Derivatives Strategy: Guillaume Derville, Winner Lee, Shun Maruyama, Shuai Chen
Flow Sales: Hong Kong: (852) 2108 5639, Singapore: (65) 6210 1883
NOT F or
(USD b)
(y-y %)
4500
100
4000
80
3500
60
3000
2500
40
2000
20
1500
1000
(20)
500
0
(40)
97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14
Sources: Bloomberg; BNP Paribas; monthly data as of September 2014
04
05
06
07
08
09
10
11
12
13
14
3M Realized Volatility
45%
HSCEI
80%
3M Implied Volatility
75%
40%
70%
35%
65%
30%
60%
25%
55%
50%
20%
45%
15%
10%
Jan 12
40%
Jul 12
Jan 13
Jul 13
Jan 14
16
Jul 14
Jan 15
35%
Jan-14
Apr-14
Jul-14
Asia Equity Derivatives Strategy: Guillaume Derville, Winner Lee, Shun Maruyama, Shuai Chen
Flow Sales: Hong Kong: (852) 2108 5639, Singapore: (65) 6210 1883
Oct-14
Jan-15
NOT F or
(contract)
40000
Call Volume
Put Volume
35000
30000
25000
20000
15000
10000
5000
2009
2010
2011
2012
17
2013
2014
2015
0
Jul-14
Asia Equity Derivatives Strategy: Guillaume Derville, Winner Lee, Shun Maruyama, Shuai Chen
Flow Sales: Hong Kong: (852) 2108 5639, Singapore: (65) 6210 1883
NOT F or
2.
3.
Buy Mar-15 105% Worst-of-Call on Chinese Banks (CCB [939 HK], ICBC
[1398 HK] and BOC [3988 HK]) at 2.5% (34.8% discount to the cheapest
individual call on ICBC at 3.835%, implied correlation offer at 93%)
4.
Buy High Yield A-shares Basket and/or Buy China Properties Basket
5.
Sell Mar-15 110% Call and Buy 90% Put on HSCEI receives 0.33% (delta
39%)
(vol-pt)
28.0
26.0
4.0
24.0
3.0
2.0
22.0
1.0
20.0
0.0
18.0
(1.0)
16.0
(2.0)
14.0
1M
2M
3M
6M
9M
18
5.0
(3.0)
2008
2009
2010
2011
2012
Asia Equity Derivatives Strategy: Guillaume Derville, Winner Lee, Shun Maruyama, Shuai Chen
Flow Sales: Hong Kong: (852) 2108 5639, Singapore: (65) 6210 1883
2013
2014
2015
NOT F or
2.
Buy Mar-15 105% Worst-of-Call on Chinese Banks (CCB [939 HK], ICBC
[1398 HK] and BOC [3988 HK]) at 2.5% (34.8% discount to the cheapest
individual call on ICBC at 3.835%, implied correlation offer at 93%)
Buy Mar-15 105% Call ICBC (1398 HK) at 3.835% (30.6 i.v.), CCB (939 HK) at
4% (31.5 i.v.) and BOC (3988 HK) at 3.89% (30.9 i.v.)
We believe China is at the beginning of a monetary easing cycle; Chinese banks and
insurers should be key beneficiaries. Investors can also consider buying worst-of-call on
the three big Chinese banks (ICBC, CCB and BOC), which offers 34.8% discount to the
cheapest plain-vanilla call. The breakeven of this structure requires the worst performer
to rally by strike+premium, which is 7.5% for this WoC on Chinese Banks. In the latest
China Banks 2015 Outlook report, dated 5 December 2014, Judy has downgraded ABC
(1288 HK) to HOLD but maintained the BUY rating on CCB, ICBC and BOC with higher
target prices at HKD8 (24.4% upside), HKD7 (22.6%) and HKD4.92 (11.6%).
China financial consensus valuations and BNP Paribas target prices
Code
Nam e
Mkt Cap
(HKD b)
Chinese Banks
939 HK CCB
1398 HK ICBC
998 HK China Citic Bank
3988 HK BOC
3328 HK BoComm
1988 HK Minsheng Bank
1288 HK ABC
3968 HK CM Bank
Sector Average
Chinese Insurers
2628 HK China Life
2318 HK Ping An
2601 HK China Pacific Insurance
1336 HK New China Life Insurance
Sector Average
EPS
Grow th
y-y%
PB (x) DY (%)
BNPP
rating
Target Upside
(%)
Price
(HKD)
1,621
2,173
405
1,464
576
422
1,552
509
8,722
6.43
5.71
6.11
4.41
7.03
9.97
4.02
18.86
5.6
5.8
5.5
5.9
6.4
5.8
5.6
6.6
5.8
5.2
5.5
5.2
5.5
6.1
5.5
5.3
6.0
5.5
6.2%
4.9%
6.8%
7.9%
4.8%
5.8%
7.4%
10.0%
6.5%
1.0
1.1
0.9
0.9
0.9
1.1
1.0
1.2
1.0
6.3
5.9
5.1
5.8
4.6
3.1
6.2
4.3
5.7
BUY
BUY
BUY
BUY
BUY
BUY
BUY
HOLD
8.00
7.00
7.10
4.92
8.00
10.80
4.03
18.14
24.4%
22.6%
16.2%
11.6%
13.8%
8.3%
0.2%
-3.8%
14.0%
1,073
740
352
167
2,332
29.7
80.1
37.85
40.7
20.0
13.8
23.1
14.3
18.1
17.1
12.6
19.2
12.9
15.7
17.1%
9.1%
20.6%
11.0%
14.7%
2.6
2.2
2.5
2.2
2.4
1.5
1.1
1.4
0.8
1.3
BUY
BUY
BUY
BUY
34.09
105.68
46.88
46.92
14.8%
31.9%
23.9%
15.3%
21.6%
(Index, Jan-14=100)
China Life
Ping An
China Pacific Insurance
140
130
ICBC
CCB
BOC
120
130
120
110
110
100
100
90
80
Jan-14
90
Apr-14
Jul-14
Oct-14
19
Jan-15
80
Jan-14
Apr-14
Jul-14
Asia Equity Derivatives Strategy: Guillaume Derville, Winner Lee, Shun Maruyama, Shuai Chen
Flow Sales: Hong Kong: (852) 2108 5639, Singapore: (65) 6210 1883
Oct-14
Jan-15
NOT F or
3.
While the hunt for yield has been a well-known process in the western world, we believe
it just started in the domestic A-shares universe. Chinese high yielding stocks used to
underperform in a domestic market driven by retail investors. Considering that yield
hunting has been a major investment theme in the developed world and international
equity markets over the past couple of years, foreign investors should focus on domestic
Chinese stocks offering attractive yields and depressed valuations. The basket rallied
37.6% since the interest rates cut and outperformed the SHCOMP Index by 2.5%.
Additional returns will be generated from the yield, which is quite high at 3.9% in FY14
and 4.1% in FY15. The basket offers decent liquidity at USD60m per day.
The saving deposit rate has more potential to decline; BNPP China Chief Economist,
Xingdong Chen, expects two more interest rate cuts in 2Q and 3Q: the 1-year household
saving deposit rate has the potential to reach 2.25% from the current 2.75%. High Yield
A-shares make sense given the basket is still trading at very undemanding valuations.
High yield A-shares basket
Code
Nam e
Sector
Industrial Transportation
Auto & Parts
Electricity
Electricity
Mining
Metals & Mining
Oil & Gas
Oil & Gas
Banks
Banks
(CNY)
12.18
24.67
9.09
10.87
22.86
7.17
7
11.69
6.82
5.1
28,161
43,173
20,334
29,182
70,354
18,784
123,070
326,758
209,445
281,725
Price
340.6
243.8
150.7
177.7
381.7
214.6
696.9
450.8
572.4
591.2
PE (x)
FY14
2.2
1.9
1.9
2.2
1.6
1.0
1.4
1.8
1.4
1.2
1.7
1.9
12.1
9.7
10.5
17.1
11.9
17.5
11.8
16.5
7.4
6.4
12.1
9.9
PE (x)
FY15
DY (%)
FY14
10.6
8.5
10.1
16.5
11.6
14.8
12.1
16.7
7.0
6.1
11.4
7.1
4.2
4.8
4.9
3.0
3.5
2.6
3.3
2.6
4.6
5.3
3.9
2.8
DY (%) Weight
FY15
4.8
5.5
5.3
3.1
3.6
3.1
2.9
2.3
4.9
5.6
4.1
4.0
10.5%
9.2%
9.9%
9.8%
10.1%
11.0%
8.5%
10.0%
11.4%
9.8%
100.0%
% YTD
10.3
13.2
1.0
2.9
11.6
1.0
6.0
7.8
0.1
3.9
5.6
2.3
(Index, Jan-14=100)
Jan-13
Jan-14
20
Jan-15
175.0
165.0
155.0
145.0
135.0
125.0
115.0
105.0
95.0
85.0
Jan-14
Apr-14
Jul-14
Oct-14
Asia Equity Derivatives Strategy: Guillaume Derville, Winner Lee, Shun Maruyama, Shuai Chen
Flow Sales: Hong Kong: (852) 2108 5639, Singapore: (65) 6210 1883
Jan-15
NOT F or
Historically, rate-cut policies have prompted industry wide re-rating for the properties sector
Frwd P/E (x)
Max
35
Min
30
25
20
14.2
10
8.1
Jan-15
Nov-14
Sep-14
Jul-14
May-14
Jan-14
Mar-14
Nov-13
Jul-13
Sep-13
May-13
Jan-13
Nov-12
Jul-12
May-12
Jan-12
Nov-11
Mar-12
Jul-11
Sep-11
May-11
Jan-11
Mar-11
Nov-10
Sep-10
Jul-10
Mar-10
May-10
Jan-10
Nov-09
Jul-09
Sep-09
May-09
Jan-09
Mar-09
Sep-12
1.9
2.1
4.7
7.6
Mar-13
15
BNP Paribas China Properties Basket consensus valuations and BNP Paribas target prices
Code
%
Price Mkt Cap Est T/O P/BV PE (x) PE (x) DY (%) DY (%) Weight BNPP BNPP TP
USD
m
(USD
m
)
(x)
Cur
Yr
Nxt
Yr
Cur
Yr
Nxt
Yr
Upside
Rating
(HKD)
HKD
Nam e
10.28
5.83
18.92
25.25
3.38
11.18
4,246
2,196
8,499
26,192
8,896
8,389
17.2
8.6
30.2
99.1
18.3
5.6
0.8
0.7
1.2
1.7
1.0
1.2
1.1
5.0
4.7
6.0
9.0
5.1
7.0
6.1
4.3
4.0
5.3
7.8
4.6
6.3
5.4
6.3
6.5
5.1
2.2
6.8
2.8
4.9
7.1
7.6
5.8
2.5
7.5
3.2
5.6
16.8%
17.0%
16.5%
16.4%
16.6%
16.7%
100.0%
BUY
BUY
BUY
BUY
BUY
BUY
13.9
7.5
22.0
26.7
3.5
11.2
34.8%
28.6%
16.1%
5.5%
3.3%
-0.3%
14.8%
(x)
14.0
(Index, Jan-2012=100)
Shui On Land
12.4
12.0
CRL
10.0
8.7
8.0
6.0
Cogard
4.0
COLIVanke
Longfor 6.5 7.0
Sino Ocean
6.2
Poly
5.4
Fantasia
4.8
COGO
Franshion
Agile
3.8 4.7
4.0
Shimao 3.2
2.0
Kaisa
RF
KW
3.4
3.5
3.4
Greentown
Sunac
1.5
0.0
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
230.0
210.0
190.0
170.0
150.0
130.0
110.0
90.0
70.0
Jan-12
Jan-13
Jan-14
% of land bank which has rising ASP, good margins & sales volume
21
Asia Equity Derivatives Strategy: Guillaume Derville, Winner Lee, Shun Maruyama, Shuai Chen
Flow Sales: Hong Kong: (852) 2108 5639, Singapore: (65) 6210 1883
Jan-15
NOT F or
4.
Buy Chinese Banks & Insurers (or Buy H-FIN) and Short Chinese Brokers
Then also on a daily basis, we observe the cumulated realised variance of R(t) as V(t):
On the day V(t) is above the square of the budget (17% x 17%), investor receives the
payout of the call on that date. If the V(t) has never reached the square of the budget,
investor receives the payout on maturity date.
22
Asia Equity Derivatives Strategy: Guillaume Derville, Winner Lee, Shun Maruyama, Shuai Chen
Flow Sales: Hong Kong: (852) 2108 5639, Singapore: (65) 6210 1883
NOT F or
135
130
125
120
115
110
105
100
95
90
85
2012
HSCEI
50
A50 Tracker
46
42
38
34
30
26
22
18
2013
2014
1M
2015
2M
3M
6M
9M
12M
18M
24M
36M
Backtest results
50%
25%
40%
20%
30%
15%
20%
10%
10%
5%
Sliding 6-month volatilityY
0%
2006 2007 2008 2009 2010 2011 2012 2013 2014
Sources: BNP Paribas
0%
2006 2007 2008 2009 2010 2011 2012 2013 2014
Source: BNP Paribas
The domestic A-shares rally has been running ahead of the fundamentals and
overshooting the consensus bottom-up index target by 13%. A-shares earnings are likely
to benefit from upward earnings revision especially for companies with cross holding. We
agree it is hard to gauge the irrational behaviour of domestic investors, but a fair value of
SHCOMP at 3500 level (4.5% upside) seems reasonable. As the rally was pretty strong
over the past months, a short-term consolidation or pullback might be possible. Whereas
the HSCEI may have a bit more to go, with upside at about 6.5% to the consensus
bottom-up index target, 5.1% to our base case scenario and 11.7% to our high case
scenario.
HSCEI Consensus Bottom-up Index target
(Index)
17000
16000
15000
14000
13000
12000
11000
10000
9000
8000
Jan-10
HSCEI
Consensus Bottom-up Index Target
(Index)
4300
SHCOMP
Consensus Bottom-up Index Target
3800
SHCOMP overshot
consensus index
target by 13%
3300
2800
2300
Jan-11
Jan-12
Jan-13
Jan-14
23
1800
Jan-10
Jan-11
Jan-12
Jan-13
Asia Equity Derivatives Strategy: Guillaume Derville, Winner Lee, Shun Maruyama, Shuai Chen
Flow Sales: Hong Kong: (852) 2108 5639, Singapore: (65) 6210 1883
Jan-14
NOT F or
Buy Chinese Banks and Insurers (or Buy H-FIN) and Short Chinese Brokers
According to BNP Paribas Chinese financials analyst, Judy Zhangs latest sector report
on Chinese Brokers 2015 Outlook: Is this leverage-driven rally sustainable? (18
December 2014), the leverage-driven A-share rally increases the cost of funding for
China; it may persuade the government to launch measures to control leverage. When
the A-share market momentum turns, we expect forced liquidations and panic selling.
Loan-related business contributed over 40% of H-share listed broker earnings in 1H14.
In light of the accelerating integration of financial segments, banks may be allowed to
enter the underwriting business dominated by brokers; the brokers investment banking
business could be marginalised.
Brokers and banks are both benefiting by entering each others businesses. A-share
brokers are trading at 3.68x FY15E P/BV, while H-share brokers trade at 2.4x. Broker
valuations look high compared to banks trading at 1.1x FY15E P/BV; discrepancies are
hard to justify especially as brokers have shifted to more capital-intensive business
models with higher balance sheet risks. We think the risk/reward profile of Chinese
brokers is unattractive.
We suggest investors consider buying Chinese Banks and Insurers (or using H-FIN)
while selling Chinese brokers as the funding leg. Borrow costs for Citic Securities (6030
HK), Haitong Securities (6837 HK) and China Galaxy Securities (6881 HK) are all at
40bp.
China Diversified Financials-Dec14.pdf: http://www.bnppresearch.com?E=deifhkbgff
China broker valuations
Code
Nam e
Mkt Cap
(HKD b)
Chinese brokers
6030 HK Citic Securities
6837 HK Haitong Securities
6881 HK China Galaxy Securities
Sector Average
476
277
79
833
29.1
19.44
10.14
31.1
23.7
19.9
24.9
25.2
18.6
16.1
20.0
EPS
Grow th
y-y%
23.7%
27.6%
23.4%
24.9%
PB (x) DY (%)
2.8
2.3
2.3
2.5
1.1
1.3
1.4
1.2
BNPP
rating
REDUCE
HOLD
REDUCE
5.
Sell Mar-15 110% Call and Buy 90% Put on HSCEI receives 0.33% (delta
39%)
Investors kept chasing upside on A and H shares since the rate cuts and sent the HSCEI
and A50 Tracker skews to extremely low levels. The extraordinarily low skews probably
reflect a lot of bullishness has been priced in. Also, EDS Asia believes Chinas policy
makers do not feel there is an urgent need to pump liquidity into the financial system and
the next two rate cuts may be implemented in 2Q and 3Q. With the recent strong
momentum, A and H shares are likely to test their peaks in January or even in February
(likely around the Chinese New Year when the financial system will be flooded with
liquidity). Then, the market has the chance to enter a consolidation phase.
EDS Asia is rather bullish on China in 2015 overall but cannot rule out a short-term
pullback, we will continue to monitor the market condition. Cautious investors can
monetise the extremely low skew environment to consider selling calls to fund buying
puts as a way to hedge. Both of their 3M and 6M 90-110% skews are at extraordinarily
low levels, making the strategy to receive premium.
24
Asia Equity Derivatives Strategy: Guillaume Derville, Winner Lee, Shun Maruyama, Shuai Chen
Flow Sales: Hong Kong: (852) 2108 5639, Singapore: (65) 6210 1883
Target Upside
Price
(%)
(HKD)
23.50
16.80
8.40
-19.2%
-13.6%
-17.2%
-16.7%
NOT F or
(vol-point)
11.0
9.0
7.0
5.0
3.0
1.0
(1.0)
2009
2010
2011
2012
25
2013
2014
2015
(3.0)
2008
2009
2010
2011
2012
Asia Equity Derivatives Strategy: Guillaume Derville, Winner Lee, Shun Maruyama, Shuai Chen
Flow Sales: Hong Kong: (852) 2108 5639, Singapore: (65) 6210 1883
2013
2014
2015
NOT F or
(%)
6.0
5.0
4.0
CPI (LHS)
(Index)
7.0
500
6.0
450
5.0
400
350
4.0
300
3.0
3.0
2.0
1.0
250
2.0
200
1.0
150
0.0
00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15
100
00 01 02 03 04 05 06 07 08 09 10 11 12 13 14
26
Asia Equity Derivatives Strategy: Guillaume Derville, Winner Lee, Shun Maruyama, Shuai Chen
Flow Sales: Hong Kong: (852) 2108 5639, Singapore: (65) 6210 1883
NOT F or
(JPYKRW)
18
16
14
35
30
300
25
250
20
200
15
150
10
2005 2006 2007 2008 2009 2010 2011 2012 2013 2014
100
12
10
8
6
2008
2009
2010
2011
2012
2013
2014
2015
15.0%
% Change since end-June
10.0%
5.0%
0.0%
-5.0%
-10.0%
-15.0%
-20.0%
-15.4%
JPY
-13.3%
AUD
-8.9%
-8.2%
GBP
CAD
-11.6%
EUR
DXY
-4.5% -2.9%
-7.3% -5.6%
-16.7%
-44.0%
RUB
BRL
KRW
TWD
INR
ADXY
27
0.0%
Asia Equity Derivatives Strategy: Guillaume Derville, Winner Lee, Shun Maruyama, Shuai Chen
Flow Sales: Hong Kong: (852) 2108 5639, Singapore: (65) 6210 1883
CNY
NOT F or
20
15
11.8
11
Overseas
equities,
11.3%
10
Domestic
fixed
income
55.1%
5.3
5
0
TH
TW
PH
KO
CH
ID
MY
HK
SP
IN
35
30
300
25
250
20
200
(Index, Jan-10=100)
Kospi2
200
Samsung Electronics
180
160
140
120
15
150
10
2005 2006 2007 2008 2009 2010 2011 2012 2013 2014
100
28
100
80
2010
2011
2012
2013
2014
Asia Equity Derivatives Strategy: Guillaume Derville, Winner Lee, Shun Maruyama, Shuai Chen
Flow Sales: Hong Kong: (852) 2108 5639, Singapore: (65) 6210 1883
2015
NOT F or
(USD b)
70.0
60.0
50.0
40.0
30.0
20.0
10.0
0.0
(10.0)
2009
2010
2011
2012
2013
2014
(Index)
300
280
260
240
220
200
180
160
140
120
2015
Apr-14
Jul-14
BNPP Regional Equity Strategist, Manishi Raychaudhuri published his latest Asia
Strategy report, 2015 Outlook: Choose your boat carefully, on 13 December. He
identifies the investment drivers for 2015 as USD appreciation, commodity price
moderation, policy divergence and reforms and restructuring across Asia. He believes
the main beneficiaries are likely to be North Asia, India and Thailand. He is
OVERWEIGHT on Korea due to its cheap valuations and strong basic balance surplus.
Asia Strategy-Dec14.pdf: http://www.bnppresearch.com?E=deibekbgff
On 25 September, Manishi upgraded Korean equities (to OVERWEIGHT from
Underweight). His positive stance on Korea is based on his belief that:
29
Oct-14
Impending rate hikes in the US are clearly associated with growth optimism in
the country. Historically, US growth has been a strong determinant of Korean
export growth, and export growth has historically percolated to domestic growth.
The US ISM (new orders sub index) has been a good lead indicator of Korean
export growth; that index is almost at a decade high in recent surveys.
Domestic growth also seems to be taking off with the recent recovery in capex
and private consumption. Inflation remains low well below the BoKs reference
rate but is gradually increasing (particularly core inflation) and that should
support domestic consumption further. The recovery in housing prices
(particularly in Seoul) is also likely to support bank lending and consumption, as
BNPs Anderson Cha argues in his recent report, Where do we stand now?
http://www.bnppresearch.com?E=ddejhkbfjga
Asia Equity Derivatives Strategy: Guillaume Derville, Winner Lee, Shun Maruyama, Shuai Chen
Flow Sales: Hong Kong: (852) 2108 5639, Singapore: (65) 6210 1883
NOT F or
The current account and fiscal surplus make Korea attractive in a stronger US
dollar and tighter US monetary policy environment.
US ISM vs. Korean exports
(y-y%)
50.0
40.0
30.0
20.0
80
(USD b)
8.0
70
6.0
60
4.0
2.0
10.0
0.0
50
0.0
(10.0)
(20.0)
(30.0)
40
(40.0)
00 01 02 03 04 05 06 07 08 09 10 11 12 13 14
Sources: Bloomberg; BNP Paribas; monthly data as of November 2014
(2.0)
30
(4.0)
20
(6.0)
96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14
BNP Paribas EDS reiterated its bullish stance on Korea based on:
1.
2.
3.
4.
5.
30
Asia Equity Derivatives Strategy: Guillaume Derville, Winner Lee, Shun Maruyama, Shuai Chen
Flow Sales: Hong Kong: (852) 2108 5639, Singapore: (65) 6210 1883
NOT F or
Attractive valuations
Korean equity valuations are attractive on an absolute basis and relative to Asia exJapan markets. It is worth noting that South Korean and Chinese equities were major
beneficiaries of valuation convergence and/or the switch from growth to value style
during 3Q14.
Over the third quarter Samsung Electronics (about 20% of Kospi2) substantial
downward earnings revision offset Kospi2 constituents performance improvement;
Kospi2s valuation (9.1x P/E, 0.9x P/BV and 1.7% DY in 2015) is less attractive but
remains cheaper than the Asia ex-Japan universe average (MXASJ 10.6x P/E, 1.3x
P/B and 3.1% DY).
EM valuation comparison 2015 consensus P/E
PE (x)
20.0
17.8
16.9
18.0
14.8
16.0
12.8 13.3 13.6 13.7
14.0
10.6 10.6
12.0
9.1
10.0
7.3
8.0
6.0
4.0
2.0
-
2.6
2.3 2.3
2.5
2.0
1.5
1.0
0.9
1.3
1.0 1.2
1.7
1.4 1.6
1.9
0.5
-
PE (x)
Kospi2
Level
Upside /
Probability
dow nside
(%)
(%)
10.05
240
(Index)
360
Low Case
Base case
High Case
Consensus Bottom-Up Index Target
320
Low
9.70
232
-3.5%
20%
Base
11.50
275
14.5%
50%
High
12.00
287
19.4%
30%
280
240
200
Expected return
12.4%
28.6%
31
100%
160
120
2006 2007 2008 2009 2010 2011 2012 2013 2014 2015
Sources: Bloomberg; BNP Paribas; data as of 6 January 2015
Asia Equity Derivatives Strategy: Guillaume Derville, Winner Lee, Shun Maruyama, Shuai Chen
Flow Sales: Hong Kong: (852) 2108 5639, Singapore: (65) 6210 1883
NOT F or
Buy Dec-15 105% Down-and-In Call on Kospi2 with 95% KI barrier (daily
close observation until Mar-15) at 1.05%
76.4% discount to plain vanilla Dec-15 105% Call at 4.45%
Buy Dec-15 110% Lookback Call on Kospi2 Index (daily close lookback
until Mar-15) at 4.3%
50.9% premium to plain vanilla Dec-15 110% Call at 2.85%
(vol-point)
(vol-point)
14
100.0
90.0
3M 90-110% Skew
12
80.0
10
70.0
8
60.0
50.0
40.0
30.0
20.0
10.0
2007 2008 2009 2010 2011 2012 2013 2014 2015
Sources: Bloomberg, BNP Paribas; data as of 6 January 2015
0
2007
2008
12M Implied-Vol
40
35
50
2012
2013
2014
2015
33.5
12M Implied-Vol
24M Implied-Vol
35.0
30
45
26.3
27.3
25.0
25
40
20.1
20
35
30
15
25
10
20
18.2
0
2009
2010
2011
2012
32
2011
24M Implied-Vol
55
15
2008
2010
2009
2013
2014
2015
2008
2009
2010
2011
2012
Asia Equity Derivatives Strategy: Guillaume Derville, Winner Lee, Shun Maruyama, Shuai Chen
Flow Sales: Hong Kong: (852) 2108 5639, Singapore: (65) 6210 1883
2013
2014
NOT F or
Investors can monetize the flat upside skew by buying call spreads
The implied volatility term structure on Kospi2 continues to be upward sloping with shortto-medium volatilities remaining under pressure. The short- to medium-term upside
skews are also staying at extraordinarily flat levels, thus offering investors attractive
upside exposure using the Call spread.
EDS Asia targets 14.5% to 19.4% upside potential based on our base and high case
scenarios, thus, we advise investors to consider buying 3M to 6M 105-115% call spread
to lower the premium.
Risk exposure: investors who bought call spread will have limited downside risk at the
premium paid.
Kospi2 Implied volatility term structure
(vol-pt)
Current
17.0
1-wk ago
1-mth ago
16.0
15.0
14.0
13.0
12.0
11.0
1M
2M
3M
6M
9M
3M 105-120% Skew
6M 105-120% Skew
2010
2011
2012
Buy Dec-15 105% Down-and-In Call on Kospi2 with 95% KI barrier (daily
close observation until Mar 15) at 1.05%
76.4% discount to plain vanilla Dec-15 105% Call at 4.45%
Buy Dec-15 110% Lookback Call on Kospi2 Index (daily close lookback
until Mar 15) at 4.3%
50.9% premium to plain vanilla Dec-15 110% Call at 2.85%
We propose the Down-and-In Call and Lookback Call for investors who expect a shortterm correction before a more sustainable rally on Kospi2 Index.
The Down-and-In Call (or Knock-In Call) allows investors to pay a cheaper premium in
order to buy upside, but the call option will be activated when knock-in barrier is reached.
A Down-and-In Call is taking advantage of the current cheap implied volatility.
An alternative strategy would be to consider a Lookback Call. Investors will strike the call
at the lowest closing spot within the lookback period. This strategy is more expensive
than the plain-vanilla call, but investors secure holding the call positon and maximize the
entry point.
33
Asia Equity Derivatives Strategy: Guillaume Derville, Winner Lee, Shun Maruyama, Shuai Chen
Flow Sales: Hong Kong: (852) 2108 5639, Singapore: (65) 6210 1883
2013
2014
2015
NOT F or
17
16
250%
16
15
15
200%
14
13
14
13
150%
12
11
100%
11
10
10
50%
9
8
2008
108%
12
2009
2010
2011
2012
2013
2014
2015
0%
May 12
8
Nov 12
May 13
Nov 13
May 14
Nov 14
5.5%
5.0%
0.0%
-2.6% -2.8% -3.2%
-4.0%
-5.0%
-6.0%
-10.0%
-15.0%
NKY
INR
TWD
34
JPY
USD m
Japan
Korea
10/31/2014
4,775
206
11/7/2014
6,712
(306)
11/14/2014
4,029
11/21/2014
1,119
926
11/28/2014
(933)
762
12/5/2014
3,171
382
12/12/2014
1,344
(685)
12/19/2014
(3,037)
(1,577)
12/26/2014
Total
303
17,481
(49)
(334)
Asia Equity Derivatives Strategy: Guillaume Derville, Winner Lee, Shun Maruyama, Shuai Chen
Flow Sales: Hong Kong: (852) 2108 5639, Singapore: (65) 6210 1883
NOT F or
Consensus Forecast
130
1160
1150
1140
1130
1120
1110
1100
1090
1080
1070
Implied Forward
125
120
115
110
105
100
1Q15
2Q15
3Q15
2015
2016
Consensus Forecast
Implied Forward
2017
2018
1Q15
2Q15
3Q15
2015
2016
2017
2018
KRW depreciates against the JPY; given Japanese corporates might suffer
under further JPY weakening (Tipping point around 125-130), the USDJPY
might has peaked over the short run (unless BoJ further expands QQE [low
probability in the short term]).
2.
At the beginning of the 2000s, the JPY currency weakened from JPY115.55/USD in
January 2001 to JPY134.71/USD in February 2002 (14% depreciation); at the same time
the NKY plunged by 29% (to 9,686 from 13,691). Meanwhile, the 3M realised correlation
of NKY Index and USDJPY reversed to -60% from 60%. If USDJPY currency breaks the
JPY125130/USD tipping point, equities vs. currency correlation might collapse from the
recent, relatively high correlation level (average 3M realised correlation at 68% in 2013
and 77% in 2014).
During the above mentioned period (JPY weakening scenario during 2001-02),
exporters overall performance was flattish till end-2002. However, the Japanese
Exporters Basket enjoyed higher volatility than the NKY Index. The 1Y realised
correlation Japanese exporters vs. USDJPY enjoyed a large swing from -50% in July
2001 to +50% in July 2002 (no significant correlation to the NKY Index vs. USDJPY).
NKY vs. USDJPY (2000-02)
(Index)
22000
(USDJPY)
140
80%
20000
135
60%
18000
130
40%
16000
125
20%
14000
120
0%
12000
115
-20%
10000
110
-40%
8000
105
-60%
6000
100
-80%
Jan-01
00
NKY (LHS)
01
JPY (RHS)
02
35
1Y realized correlation
3M realized correlation
Jul-01
Jan-02
Jul-02
Asia Equity Derivatives Strategy: Guillaume Derville, Winner Lee, Shun Maruyama, Shuai Chen
Flow Sales: Hong Kong: (852) 2108 5639, Singapore: (65) 6210 1883
NOT F or
(Index)
NKY (LHS)
Basket Performance (RHS)
20000
120
50
110
45
18000
100
16000
90
14000
80
12000
70
10000
60
25
8000
50
20
40
15
Jan 01
6000
00
01
02
NKY
40
35
30
Jul 01
Jan 02
1Y realized correlation
50%
0%
-50%
-100%
Jan 01
Jul 01
Jan 02
Jul 02
2.
36
Jul 02
Asia Equity Derivatives Strategy: Guillaume Derville, Winner Lee, Shun Maruyama, Shuai Chen
Flow Sales: Hong Kong: (852) 2108 5639, Singapore: (65) 6210 1883
NOT F or
The payoff of the Call on Dispersion trade is a call on the average absolute distance
between individual stocks performance and the basket performance. It will be most
profitable when some stocks in the basket move in one extreme direction while the rest
stocks move in the other extreme direction.
Japanese and Korean Exporters Basket [Up to USD50m notional]
Stocks
Code
Sector
Weight (%)
Toyota Motor
7203 JT
Autos
7.1%
% EPS impact on
every 1%
depreciation in JPY
or KRW
+1.3%
Honda Motor
7267 JT
Autos
7.1%
+1.1%
Canon Inc
7751 JT
Electronics/Office Equip
7.1%
n.a.
Panasonic Corp
6752 JT
Electronics/Office Equip
7.1%
+0.3%-0.5%
Sony Corp
6758 JT
7.1%
n.a.
+1.2%
Nissan Motor
7201 JT
Autos
7.1%
Bridgestone Corp
5108 JT
Auto Components
7.1%
n.a.
Samsung Electronics
005930 KS
7.1%
+0.2%
Hyundai Motor
005380 KS
Autos
7.1%
+1.8%
SK Hynix
000660 KS
7.1%
+1.7%
POSCO
005490 KS
Materials
7.1%
+3%
000270 KS
Autos
7.1%
+3.7%
LG Display
034220 KS
7.1%
+7%
LG Electronics
066570 KS
7.1%
+6%
Backtest
Quanto
80%
70%
60%
50%
40%
30%
20%
10%
0%
Nov-09
Nov-10
37
Nov-11
USD 50m
Premium
Nov-12
Nov-13
USD
Strike Date
07-Jan-15
End Date
03-Jun-16
Strike
30%
Premium
2.7%
Correlation Bid
30%
Implied Volatility
30%
Asia Equity Derivatives Strategy: Guillaume Derville, Winner Lee, Shun Maruyama, Shuai Chen
Flow Sales: Hong Kong: (852) 2108 5639, Singapore: (65) 6210 1883
NOT F or
Companies with large cash piles or improving free cash flows, which creates
room for dividend increases; these companies will potentially be taxed for their
large cash balances in the upcoming reforms should they decide not to invest or
pay back the cash.
State-owned enterprises that would potentially receive more pressure from the
government and NPS to increase dividends.
All basket constituents are represented in the Kospi2 Index (most notably
Samsung Electronics [005930 KS] which takes up 22% of Kospi2). The baskets
constituents represent 55% of the index, which is in line with our view that the
corporate governance reforms will significantly affect the index heavyweights.
According to our back test, the basket started to outperform the index as
Choinomics pressure kicked off in 1H13, and has outperformed the index by
5.7% in 2014. However, the basket pulled back 5% against the index, driven by
Samsung Electronics 2Q announcement on 31 July 2014. Samsung did not
announce an improvement in dividend yield or a share buyback scheme. The
market had expected a more favourable stance on shareholder returns and, as
a result, Samsungs share price plunged.
38
Asia Equity Derivatives Strategy: Guillaume Derville, Winner Lee, Shun Maruyama, Shuai Chen
Flow Sales: Hong Kong: (852) 2108 5639, Singapore: (65) 6210 1883
NOT F or
25%
116
114
112
110
108
106
104
102
100
98
96
Jan-13
20%
15%
10%
Industrial Bank
Amorepacific
LG Electronics
KT&G Corp
KB Financial Group
KIA Motors
SK Telecom
Hyundai Mobis
Shinhan Financials
Naver Corp
Sk Hynix Inc
Samsung Electronics
0%
Hyundai Motor
5%
YTD: 5.7%
Choi appointed as
finance minister
Jul-13
Jan-14
Jul-14
Jan-15
Mkt Cap
USD m
30d
ADVT
USD m
Weight
in
basket
Weight
in
Kospi2
DPS
2013
DPS
2014
DPS
Upside
(BNPe)
1,295,000
173,625
308.0
38.6%
22.5%
13800
19520
20950
164,500
32,982
94.2
7.4%
4.0%
1950
2118
4500
47,500
31,475
68.2
7.1%
4.3%
743,000
43,550
229,000
22,292
18,797
20,290
47.9
30.5
35.5
4.9%
4.2%
4.5%
3.5%
2.9%
2.5%
734
650
1950
850
918
2000
274,500
20,174
33.4
4.5%
2.4%
8400
8400
51,200
18,891
32.4
4.2%
2.1%
700
750
1300
35,300
41,850
12,414
24,454
22.6
73.5
2.8%
5.5%
2.0%
2.1%
500
90
800
900
1200
1100
115,500
290,500
78,200
21,026
12,527
9,772
29.3
21.2
31.0
4.7%
2.7%
2.2%
1.8%
1.6%
1.4%
850
3750
3200
2630
4688
3500
3000
5500
3400
2,239,000
11,914
33.0
3.2%
1.1%
6500
7500
8500
60,100
13,600
8,952
6,848
30.7
26.7
2.0%
1.5%
1.0%
0.4%
200
330
300
424
500
700
194,000
3,872
40.9
0.8%
0.5%
600
3430
3430
48,000
4,033
9.5
0.9%
0.3%
1200
1500
40,150
82,500
4,234
5,791
4.6
10.9
0.9%
1.3%
0.2%
0.7%
700
1660
900
1900
1500
2100
100.0%
55.7%
Code
Nam e
Korea Corporate Governance Basket
005930 KP Samsung Electronics Co Ltd
005380 KP Hyundai Motor Co
000660 KP SK Hynix Inc
Weighted average
1000
1360
5549
39
Asia Equity Derivatives Strategy: Guillaume Derville, Winner Lee, Shun Maruyama, Shuai Chen
Flow Sales: Hong Kong: (852) 2108 5639, Singapore: (65) 6210 1883
NOT F or
8.0
4.0
0.0
(4.0)
(8.0)
(12.0)
(2)
(16.0)
Asia Equity Derivatives Strategy: Guillaume Derville, Winner Lee, Shun Maruyama, Shuai Chen
Flow Sales: Hong Kong: (852) 2108 5639, Singapore: (65) 6210 1883
2015
2014
2013
2012
2011
2010
2009
2008
14
2007
13
2006
12
2005
11
2004
10
2003
09
2002
08
2001
07
2000
06
1999
(4)
05
40
(y-y%)
10
(y-y %)
12.0
NOT F or
2.
wage growth on the back of winter bonus increases and wage hikes in spring,
3.
4.
5.
6.
7.
economic measures such as a supplementary budget (around JPY3t), an ecopoint system and distribution of regional merchandise coupons. Moreover, we
expect the government to
a.
b.
These initiatives are likely to be linked to the shoring up of regional economies, which
suffered in the wake of 2014s consumption tax hike.
The domestic economy weakness, following the consumption tax hike in 2014, damped
the appetite of corporations for capital expenditure. But, we think companies, especially
manufacturers, will sharply raise capex plans in FY3/16, encouraged by the JPY
currency depreciation, cash flow improvements and delay in the consumption tax hike.
Our BNP Paribas Japan macroeconomic team forecasts GDP growth will recover to
+1.0% in FY3/16 after slumping to -0.8% in FY3/15.
Wage growth : Real term wage growth is expected to
recover in 2015
(y-y%)
(y-y%)
50
Cash earnings
Inflation (CPI)
Capex ex software
Corporate cash flow
40
30
20
10
(2)
(10)
(4)
(20)
(30)
(6)
(40)
41
Asia Equity Derivatives Strategy: Guillaume Derville, Winner Lee, Shun Maruyama, Shuai Chen
Flow Sales: Hong Kong: (852) 2108 5639, Singapore: (65) 6210 1883
2015
2014
2013
2012
2011
2010
2009
2008
2007
2006
2005
2004
2003
2002
2001
2000
1999
1998
(50)
1997
2014
2013
2012
2011
2010
2009
2008
2007
2006
2005
2004
2003
2002
2001
2000
1999
1998
1997
(8)
NOT F or
NKY (LHS)
20000
(JPY)
1250
20000
1050
18000
18000
16000
NKY (LHS)
NKY Bloomberg Estimated ROE (RHS)
10
16000
850
14000
(%)
12
14000
650
12000
12000
450
10000
8000
6000
05
06
07
08
09
10
11
12
13
10000
250
8000
50
6000
14
2
0
05
06
07
08
09
10
11
12
13
14
Micro shakeup
From a micro perspective, besides the improvement in corporate earnings, we anticipate
a significant improvement in corporate shareholder returns driven by increased political
pressure. These improvements include
1. a broader adoption by institutional investors such as pension funds of the JPYNKY 400 Index, which focus on efficient use of capital (ROE),
2. Financial Services Agency (FSA) guidelines for institutional investors (Principles
for Responsible Institutional Investors, Japans Stewardship Code) announced
in February 2014,
3. Companies Act revisions to reform the external director system,
4. Corporate governance strengthening through the expected establishment of a
corporate governance code ahead of the shareholder-meeting season in June
2015. In fact, dividends and share buybacks of listed companies have eclipsed
their 2008 peak.
Shareholder returns (1) : Dividend
8
JPY trillion
3.00%
2.50%
3.0%
2.5%
6
2.00%
5
4
1.50%
1.00%
2.0%
6
5
1.5%
4
3
1.0%
2
0.50%
1
0
0.00%
2000
2002
2004
2006
2008
42
JPY trillion
9
2010
2012
2014
0.5%
0.0%
0
2003
2005
2007
2009
2011
2013
Total amout of share buyback (LHS)
Percentage share against market cap (RHS)
Asia Equity Derivatives Strategy: Guillaume Derville, Winner Lee, Shun Maruyama, Shuai Chen
Flow Sales: Hong Kong: (852) 2108 5639, Singapore: (65) 6210 1883
NOT F or
12%
5.0%
10%
4.0%
8%
3.0%
6%
2.0%
4%
1.0%
2%
0.0%
-2%
-1.0%
1982
1983
1984
1985
1986
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
1982
1983
1984
1985
1986
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
0%
x
1.20
8.00
7.00
1.00
6.00
0.80
5.00
0.60
4.00
3.00
0.40
2.00
0.20
1.00
0.00
1982
1983
1984
1985
1986
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
1980
1981
1982
1983
1984
1985
1986
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
0.00
43
Asia Equity Derivatives Strategy: Guillaume Derville, Winner Lee, Shun Maruyama, Shuai Chen
Flow Sales: Hong Kong: (852) 2108 5639, Singapore: (65) 6210 1883
NOT F or
NKY ETFs
TOPIX ETFs
2.62%
60,000
Domestic bond
50,000
16.98%
40,000
30,000
12.14%
20,000
Domestic equity
48.39%
Foreign equity
10,000
17.79%
2012/05/25
2012/09/28
2013/02/12
2013/06/20
2013/10/28
2014/03/11
2014/07/17
2014/11/26
2009/07/09
2009/11/18
2010/03/31
2010/08/09
2010/12/16
2011/04/27
2011/09/05
2012/01/18
2007/01/04
2007/05/16
2007/09/19
2008/02/01
2008/06/11
2008/10/17
2009/03/02
44
Foreign bond
Asia Equity Derivatives Strategy: Guillaume Derville, Winner Lee, Shun Maruyama, Shuai Chen
Flow Sales: Hong Kong: (852) 2108 5639, Singapore: (65) 6210 1883
NOT F or
BOJ inflation stability target and its response determine NKY225 index target toward 2016
(30%)
(JPYUSD100)
Success (30%)
Continue QQE
(70%)
Inflation stability
target of core CPI 2%
within FY2015
Failure (70%)
(IPYUSD140)
Implement an
additional QQE
(70%)
(JPYUSD130)
(=maintain
commitment) (20%)
Status quo
(=abandon
commitment) (10%)
(JPYUSD110)
Mar-2016 NKY target
14,000
(JPYUSD100)
Inflation target
BOJ`s response
Probability
USDJPY target
(End-FY2015)
Scenario 1
Success (30%)
9%
14,000
100
Scenario 2
Success (30%)
21%
Above 20,000
140
Scenario 3
Failure (70%)
49%
18,000
130
Scenario 4
Failure (70%)
14%
16,000
110
Scenario 5
Failure (70%)
7%
14,000
100
Average
100%
17,500
125
45
Asia Equity Derivatives Strategy: Guillaume Derville, Winner Lee, Shun Maruyama, Shuai Chen
Flow Sales: Hong Kong: (852) 2108 5639, Singapore: (65) 6210 1883
NOT F or
(JPY tr)
250.0
(%)
(%)
2.50
3.5
3.0
200.0
2.00
150.0
1.50
2.0
100.0
1.00
1.5
50.0
0.50
0.0
0.00
2.5
1.0
0.5
98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14
0.0
00 01 02 03 04 05 06 07 08 09 10 11 12 13 14
Over the years, the JPY depreciation impact on the Japanese economy has diminished
due to
1. weak global growth,
2. Japans declining global competitiveness as a result of its manufacturing base
moving offshore, and
3. increased fossil fuel imports due to the shutdown of its nuclear reactors.
The sharp spike in prices, accompanying the JPY depreciation, is hurting the Japanese
economy; we believe the economy is reaching a critical point. In fact, rising costs caused
small non-manufacturer business sentiments to deteriorate, especially when the
currency depreciated beyond JPY110/USD. According to the latest Tankan business
condition figures, small enterprises (manufacturing and non-manufacturing) are
struggling to recover.
Today, companies earnings structures are more resilient than in 2007 (when the JPY
currency was at a similar level). Also low crude prices have made it easier for corporates
to cope with a weaker yen.
By trying to achieve its target in two years, we believe the risk of the BoJ making a
monetary policy mistake is high. Indeed, sharp JPY depreciation, rather than interest rate
hikes, may hamper BoJ monetary policy.
Japan consumer confidence weakened to 37.7 in
November
(Index)
60.0
55.0
Large Manufacturers
Small Manufacturers
50.0
20.0
45.0
40.0
0.0
35.0
(20.0)
30.0
(40.0)
25.0
(60.0)
20.0
05
06
07
08
09
10
11
12
13
14
46
84 86 88 90 92 94 96 98 00 02 04 06 08 10 12 14
Sources: Bloomberg, BNP Paribas; monthly data as of November 2014
Asia Equity Derivatives Strategy: Guillaume Derville, Winner Lee, Shun Maruyama, Shuai Chen
Flow Sales: Hong Kong: (852) 2108 5639, Singapore: (65) 6210 1883
NOT F or
Sinking oil prices partially offset the negative impact of the weakening JPY
In 4Q14, the oil price collapse (Brent corrected 39.7% and WTI 40.2% in JPY terms)
offset the negative impact of the weakening JPY; the latest available trade deficit
narrowed to JPY893.5b, representing a significant improvement from its JPY2.8t all-time
high deficit in January 2014. The 3Q current account deficit improved to 0.05% of GDP
from 0.11% in 2Q.
Plunging oil prices
(JPY/barrel)
17000
(JPY b)
3000
15000
2000
13000
1000
11000
9000
7000
(1000)
5000
(2000)
3000
(3000)
1000
06
07
08
09
10
11
12
13
00 01 02 03 04 05 06 07 08 09 10 11 12 13 14
14
(2)
(4)
3
(6)
2
(8)
(10)
0
(1)
(12)
00 01 02 03 04 05 06 07 08 09 10 11 12 13 14
00 01 02 03 04 05 06 07 08 09 10 11 12 13 14
Sources: Bloomberg, BNP Paribas; yearly data as of 2014
The Japan Core CPI declined to 2.4% y-y in November from its peak of 3.7% y-y in May;
the decline was due to a collapse in Electricity CPI (softened from its peak of 11.4% y-y
to 6% y-y during the same period).
BNPP Chief Economist, Ryutaro Kono, believes the core CPI (excluding tax effect)
should plunge into negative territory in 1H-2015. He believes the core CPI is greatly
dependent on oil prices and JPY fluctuations: a 10% shift in the crude oil market or in the
exchange rate can move core CPI by 0.2-0.3 points.
Kono San also highlighted that falling oil prices transfers income from producer nations
back to Japan; it corresponds to a perpetual tax cut for households: the resulting
improvement in real purchasing power should boost domestic demand. Japans jobless
rate was down to 3.5% in October and November; it will only be a matter of time before
full employment and inflationary pressures start to rise. Once full employment takes root
and companies find it chronically hard to secure needed manpower, Japanese
corporates will realize they cannot continue to cut payroll costs.
47
Asia Equity Derivatives Strategy: Guillaume Derville, Winner Lee, Shun Maruyama, Shuai Chen
Flow Sales: Hong Kong: (852) 2108 5639, Singapore: (65) 6210 1883
NOT F or
(y-y %)
15.0
6.0
10.0
5.0
5.0
4.0
0.0
3.0
(5.0)
2.0
(10.0)
2005 2006 2007 2008 2009 2010 2011 2012 2013 2014
Sources: Bloomberg, BNP Paribas; monthly data as of November 2014
1.0
82 84 86 88 90 92 94 96 98 00 02 04 06 08 10 12 14
Sources: Bloomberg, BNP Paribas; monthly data as of November 2014
Foreign inflows vs. domestic flows: Post the second leg of the BoJs QQE, foreign
investors became net buyers. In 4Q14 the total net purchases by foreigners was
USD8.7b. Domestic flows were mixed; institutional investors bought about USD12.3b but
retail investors were net sellers at USD14.8b.
Net foreign buying of USD8.7b in 4Q
(USD b)
200
NKY (RHS)
160
120
Net equity outflow of
USD17.5b in 1Q14;
Net equity inflow of
USD8.8b in 2Q ,
USD6.5b in 3Q,
USD8.7b in 4Q.
80
40
0
Oct-12 Feb-13 Jun-13 Oct-13 Feb-14 Jun-14 Oct-14
19000
18000
17000
16000
15000
14000
13000
12000
11000
10000
9000
(USD b)
Derivatives dynamics
The NKY Index implied volatility term structure drifted lower since Abes snap election
victory, as it helped to remove short-term political risks. Skews plunged afterwards due
to a downside volatility demand squeeze.
The IV term structure is drifting downward
Current
Post-BOJ Shock
Pre-BoJ Shock
Before Snap Election
(vol-pt)
28.0
26.0
14.0
12.0
10.0
24.0
8.0
22.0
6.0
4.0
20.0
2.0
18.0
1M
2M
3M
6M
9M
48
0.0
2008
2009
2010
2011
2012
Asia Equity Derivatives Strategy: Guillaume Derville, Winner Lee, Shun Maruyama, Shuai Chen
Flow Sales: Hong Kong: (852) 2108 5639, Singapore: (65) 6210 1883
2013
2014
2015
NOT F or
Call Volume
Put Volume
(Index)
1.15
1.10
1.05
16000
1.00
14000
0.95
0.90
Apr-14
Jul-14
Oct-14
49
12000
0.85
10000
0.80
Oct-12 Feb-13 Jun-13 Oct-13 Feb-14 Jun-14 Oct-14
8000
Asia Equity Derivatives Strategy: Guillaume Derville, Winner Lee, Shun Maruyama, Shuai Chen
Flow Sales: Hong Kong: (852) 2108 5639, Singapore: (65) 6210 1883
NOT F or
Upside exposure
Short-dated implied volatilities on NKY Index are elevated: Investors who want to
buy Japanese equities upside when the NKY index drops below 16,000 can consider
buying call spreads; these strategies monetise the flat upside skew.
NKY implied volatility term structure
Current
Post-BOJ Shock
Pre-BoJ Shock
Before Snap Election
(vol-pt)
28.0
26.0
5.0
4.0
3.0
24.0
2.0
22.0
1.0
20.0
0.0
18.0
1M
2M
3M
6M
9M
50
(1.0)
2008
2009
2010
2011
2012
Asia Equity Derivatives Strategy: Guillaume Derville, Winner Lee, Shun Maruyama, Shuai Chen
Flow Sales: Hong Kong: (852) 2108 5639, Singapore: (65) 6210 1883
2013
2014
2015
NOT F or
2)
When the NKY index trades in the middle of our expected trading range, potential upside
and downside risks are somehow limited on a sustainable basis. Instead of taking any
directional bet, investors might consider a daily range accrual strategy, which will capture
the potential NKY Index range trading behaviour and sell elevated short-dated implied
volatilities.
Investors will accumulate coupon when NKY Index trades within the upper and lower
barriers. For USD100m notional, if up to maturity, NKY trades in the range for 45 days
and outside the range for 21 days then the investor will pay USD27m. If NKY trades in
the range for 55 days and outside the range for 11 days then the investor will receive
USD33m. The trade breaks even when NKY trades in the range for 49.5 days.
Payoff features
Payoff
3)
150%
100%
50%
0%
-50%
-100%
-150%
-200%
-250%
-300%
-350%
10
20
30
40
50
60
n (number of day within barriers)
70
Sell Mar-15 105% Call and buy 95% Put on NKY at 0.17% (-60% delta)
Buy Mar-15 95/85% Put Spread on NKY at 1.62% (-19.5% delta)
Investors who believe further upside is limited can take advantage of the flat skew to sell
calls and buy put at almost zero cost. The downside skew is not steep, but buying put
spread can still help to cheapen marginally the premium, especially if investors expect a
mild correction to happen.
NKY downside skews are trending up
(vol-point)
14.0
9.0
8.0
7.0
6.0
5.0
4.0
3.0
2.0
1.0
0.0
2008
12.0
10.0
8.0
6.0
4.0
2.0
0.0
2008
2009
2010
2011
2012
51
2013
2014
2015
2009
2010
2011
2012
Asia Equity Derivatives Strategy: Guillaume Derville, Winner Lee, Shun Maruyama, Shuai Chen
Flow Sales: Hong Kong: (852) 2108 5639, Singapore: (65) 6210 1883
2013
2014
2015
NOT F or
(% Balance/Diffusion Index)
Large Enterprises Manufacturing
60.0
Small Enterprises Manufacturing
40.0
(% Balance/Diffusion Index)
60.0
Large Enterprises Non Manufacturing
20.0
20.0
0.0
0.0
(20.0)
(20.0)
(40.0)
(40.0)
(60.0)
40.0
(60.0)
84 86 88 90 92 94 96 98 00 02 04 06 08 10 12 14
84 86 88 90 92 94 96 98 00 02 04 06 08 10 12 14
Sources: Bloomberg; BNP Paribas; monthly data as of December 2014
The positive correlation between NKY and USDJPY might break at some stage
If the JPY continues to depreciate and accelerates faster than the market expects and
the Japanese authorities hope, it might test investor confidence over Japanese equities.
The positive correlation between the NKY index and the USDJPY currency is likely to
weaken and reverse from positive to negative. EDS Asia suggests investors take
advantage of the current positive correlation level to consider hedging against the failure
of Abenomics.
In 2001, the USDJPY depreciated to JPY134.71/USD in February 2002 (depreciated
14.2% against the USD) from JPY115.55/USD in January. At the same time the NKY
index plunged by 29% (to 9,686 from 13,691); and the 3M realised correlation of NKY
Index and USDJPY reversed from 60% to -60%. EDS Asia expects history to repeat
itself, especially if USDJPY crosses JPY125-130/USD, which we consider a tipping
point. In the event of a JPY collapse, the recent relatively high correlation level (average
3M realised correlation at 68% in 2013 and 77% in 2014) can potentially reverse.
52
Asia Equity Derivatives Strategy: Guillaume Derville, Winner Lee, Shun Maruyama, Shuai Chen
Flow Sales: Hong Kong: (852) 2108 5639, Singapore: (65) 6210 1883
NOT F or
22000
(USDJPY)
140
80%
20000
135
60%
18000
130
40%
16000
125
20%
14000
120
0%
12000
115
-20%
10000
110
-40%
8000
105
-60%
100
-80%
Jan-01
NKY (LHS)
JPY (RHS)
6000
00
01
02
1Y realized correlation
3M realized correlation
Jul-01
(USDJPY)
125
120
18000 JPY weakened from 76 in Oct-2012
115
to 105 in end-2013 (depreciated 27.6%);
110
16000 NKY rallied 85%.
105
14000
100
JPY weakened from
95
12000
101 in Jul-2014 to
90
121-level in Dec-2014;
85
(depreciated by 16.5%);
10000
80
NKY only gained 18.3%
8000
75
2012
2013
2014
2015
NKY (LHS)
JPY (RHS)
100%
3M realized correlation
80%
60%
40%
20%
0%
-20%
08
09
10
11
12
13
NKY Put Quanto vs. Put at flat premium (i.e. Zero Cost)
Buy Dec-17 NKY ATM Put Quanto USD, and Sell Dec-17 NKY 96% Put in JPY
We believe this trade hedges against the failure of Abenomics, and has such advantages
as:
1) no premium (swap flat premium); and
2) no loss if financial repression drives the NKY index higher.
See the table below for the payout sensitivity at maturity as functions of NKY spot and
USDJPY spot:
This structure is designed by GSG Asia (BNPP Global Structuring Group Asia) by taking
EDS Asias view that the weaker JPY will not favour NKY equities performance. The
structure aims to sell the high correlation between NKY and USDJPY, on the expectation
that this correlation will break once the JPY reaches its tipping point of 125-130.
Weaker JPY vs. NKY correction de-correlation to happen
Investors will make more money when the JPY weakens and NKY corrects massively
(dark blue portion).
Stronger JPY vs. NKY correction positive correlation to persist
Investors will lose money when the JPY strengthens and NKY corrects significantly (dark
red portion).
53
Jul-02
(Index)
20000
Jan-02
Asia Equity Derivatives Strategy: Guillaume Derville, Winner Lee, Shun Maruyama, Shuai Chen
Flow Sales: Hong Kong: (852) 2108 5639, Singapore: (65) 6210 1883
14
15
NOT F or
54
Asia Equity Derivatives Strategy: Guillaume Derville, Winner Lee, Shun Maruyama, Shuai Chen
Flow Sales: Hong Kong: (852) 2108 5639, Singapore: (65) 6210 1883
NOT F or
DXY (LHS)
Federal Funds Target Rate (RHS)
(%)
7
6
120
110
4
100
90
80
70
0
00 01 02 03 04 05 06 07 08 09 10 11 12 13 14
55
(Index)
(USD tr)
Federal Reserve Balance Sheet (LHS)
5.0
4.5
SPX (RHS)
4.0
3.5
3.0
2.5
2.0
1.5
1.0
0.5
2007 2008 2009 2010 2011 2012 2013 2014
Sources: Bloomberg; BNP Paribas; data as of 31 December 2014
Asia Equity Derivatives Strategy: Guillaume Derville, Winner Lee, Shun Maruyama, Shuai Chen
Flow Sales: Hong Kong: (852) 2108 5639, Singapore: (65) 6210 1883
2400
2200
2000
1800
1600
1400
1200
1000
800
600
NOT F or
DXY
98
BNP Paribas
96
94
92
90
88
86
1Q15
2Q15
3Q15
2015
2016
2017
70
80
90
100
110
120
130
140
150
160
170
weaker JPY
87 89 91 93 95 97 99 01 03 05 07 09 11 13 15
Sources: Bloomberg; BNP Paribas; data as of 2 January 2015
SPX (LHS)
2200
2000
120
Bloomberg Estimated EPS (RHS)
110
1800
100
1600
90
1400
80
1200
70
1000
60
800
50
600
40
2006 2007 2008 2009 2010 2011 2012 2013 2014 2015
Sources: Bloomberg; BNP Paribas; data as of 2 January 2015
The current SPX FY15 EPS consensus growth forecast is about 9.77% to USD124.06 as
of 2 January 2015; SPX is trading at 16.59x P/E 2014 and 16.3x P/E 2015. US equity
valuations are approaching multi-year peaks (18.2x P/E, about 9.7% to go). BNP Paribas
EDS Global remains bullish on US equities as the US economy continues its
outperformance. The first order effects were felt in late 2014: the USD strength caused
low inflation and weak commodity prices, while global flows toward US assets escalated.
56
(USD)
Asia Equity Derivatives Strategy: Guillaume Derville, Winner Lee, Shun Maruyama, Shuai Chen
Flow Sales: Hong Kong: (852) 2108 5639, Singapore: (65) 6210 1883
NOT F or
Second order effects are currently being experienced: such as persistent low US bond
yields, improvement in US consumption, but tightening emerging market financial
conditions. We believe that in 2015, third order effects will include the continuation of the
outperformance of US equities over emerging market equities.
SPX forward P/E is approaching multi-year peak
(x)
(%)
28.0
7.0
26.0
6.0
24.0
+2
5.0
4.0
16.0
mean
3.0
14.0
2.0
-2
1.0
22.0
20.0
18.0
12.0
10.0
00
02
04
06
08
10
12
00 01 02 03 04 05 06 07 08 09 10 11 12 13 14
14
650
600
550
500
450
400
350
300
250
200
2008
ADXY (RHS)
MSCI EM (LHS)
120.0
115
100.0
110
105
80.0
100
95
60.0
110
105
2009
2010
2011
2012
2013
2014
100
2015
40.0
(USDRUB)
90
85
20.0
0.0
2008
2009
2010
2011
2012
2013
2014
80
75
2015
80
70
(Index)
(Index)
650
60
600
550
50
500
40
450
30
20
400
10
350
300
98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15
08
09
10
11
12
13
14
57
Asia Equity Derivatives Strategy: Guillaume Derville, Winner Lee, Shun Maruyama, Shuai Chen
Flow Sales: Hong Kong: (852) 2108 5639, Singapore: (65) 6210 1883
NOT F or
The ruble plunged 44% in 2H14 and reached a RUB79.16/USD intra-day low on 16
December 2014. After spending USD90b to defend its currency, the Russian central
bank announced, on 16 December, a benchmark rate rise to 17% from 10.5%.
Thereafter, the RUB recovered 30% and ended 2014 trading at RUB60.7/USD. The
Russian economy has already been hurt by US and European Union sanctions and
sinking oil prices. A high interest rates environment is likely to drag the Russian economy
into recession.
Oil and commodity exporting countries Russias ruble and Brazils real collapsed the most in 2H14
% Change since end-June
0.0%
-10.0%
-16.7% -15.4%
-20.0%
-13.5% -12.1%
-9.3%
-8.8%
-8.1%
-7.3%
-6.0%
TRY
CLP
ZAR
KRW
SGD
-4.1%
-2.9%
0.0%
-4.5%
-1.4%
-5.6%
TWD
INR
IDR
ADXY
THB
CNY
-30.0%
-40.0%
-50.0%
-44.0%
-60.0%
RUB
BRL
JPY
HUF
EM
RUB = Russia Ruble, BRL = Brazilian Real, CLP = Chilean Peso, TRY = Turkish Lira, ZAR = South African Rand, HUF = Hungarian Forint, IDR = Indonesia
Rupiah, INR = Indian Rupee, THB = Thai Baht, TWD = Taiwan dollar, SGD = Singapore dollar; JPY = Japanese Yen, EM = JPMorgan EM currency index.
Sources: Bloomberg; BNP Paribas; data as of 2 January 2015
120
110
75
100
65
90
55
80
45
70
60
35
50
25
40
Jan-14
15
Apr-14
Jul-14
Oct-14
58
('k contract)
250.0
200.0
150.0
100.0
50.0
0.0
Jan-14
Apr-14
Jul-14
Oct-14
Asia Equity Derivatives Strategy: Guillaume Derville, Winner Lee, Shun Maruyama, Shuai Chen
Flow Sales: Hong Kong: (852) 2108 5639, Singapore: (65) 6210 1883
Jan-15
NOT F or
(USD/bbl)
120
110
70
100
60
90
50
80
40
70
60
30
50
20
40
Jan-14
10
Apr-14
Jul-14
Oct-14
('k contract)
100.0
80.0
60.0
40.0
20.0
0.0
Jan-14
Apr-14
Jul-14
Oct-14
Jan-15
According to Harry, OPEC is effectively forfeiting its swing supplier role, no longer
adjusting its supply to balance the market. Instead, it has relinquished this role to the
proverbial invisible hand, letting the market bring about supply and demand
adjustments through price change. The cartels motivation, be it guarding market shares
by engaging in a price war, is to crowd out the marginal higher cost producers.
World oil supply and demand assumptions (m barrel / day) on 15 October 2014
1) The residual (the difference between global oil demand and supply plus OECD stock changes) is a statistical balancing item that reflects unaccounted supply,
demand and inventory changes
2) The amount of crude oil required from OPEC to balance supply and demand in the absence of a change in inventory or price.
*Latest forecast available at the time of publication of assumptions
Sources: IEA, US EIA and BNP Paribas. Certain aggregates may not add up due to rounding.
59
Asia Equity Derivatives Strategy: Guillaume Derville, Winner Lee, Shun Maruyama, Shuai Chen
Flow Sales: Hong Kong: (852) 2108 5639, Singapore: (65) 6210 1883
NOT F or
80
(USD/bbl)
Bloomberg Consensus
BNP Paribas
120
100
87
86
84
76
68
88
75
70
65
120
9694
92
90
Bloomberg Consensus
BNP Paribas
70
100
60
40
40
20
20
92
75
73
75
4Q14
1Q15
2Q15
3Q15
80
60
95
89
79
92
103
100
96
83
93
77
0
4Q14
1Q15
2Q15
3Q15
4Q15
14
15
4Q15
14
15
DXY (LHS)
95
100
150
90
DXY (LHS)
(Index)
100
40
95
200
250
85
300
80
350
60
90
80
85
100
80
120
400
75
450
70
500
05
06
07
08
09
10
11
12
13
14
15
75
140
70
160
05
06
07
08
09
10
11
12
13
14
Under a strong USD scenario, North Asian equities should outperform South East Asian
equity markets. South Korea enjoys fiscal and current account surpluses and has healthy
foreign reserves; its economy is in a good shape to withstand any external shock.
However, the Fragile Five (India, Indonesia, Turkey, Brazil and South Africa), are
suffering from fiscal and current account deficits; they are more vulnerable to foreign
outflows. In India, the oil price correction should help to contain a difficult current account
deficit situation; in the recent emerging markets currencies correction, the Indian rupee
depreciated by 4.5% only, and has outperformed regional and global emerging
currencies. Indias trade balance deteriorated to USD16.9b in November (from
USD13.4b in October), but its current account deficit improved from its low of 5.38% of
GDP at end-2012 to 1.3% at end-September 2014.
60
20
Asia Equity Derivatives Strategy: Guillaume Derville, Winner Lee, Shun Maruyama, Shuai Chen
Flow Sales: Hong Kong: (852) 2108 5639, Singapore: (65) 6210 1883
15
NOT F or
Countries that suffered significant currency depreciation could see their central banks
liquidating US treasuries to support their own currencies. Russias central bank used its
foreign reserves to fight its currencys depreciation.
Foreign reserves
(USD b)
4500
4000
3500
3000
2500
2000
1500
1000
500
4
Russia
3
S Korea
2
1
Germany
0
Taiwan
Australia
(1)
Indonesia
(2)
China
US
(3) Turkey
Brazil
(4) S Africa
India
(5)
(6)
Japan
(7)
(8) (6) (4) (2) 0
2
4
6
8 10 12 14
CH JP TW RU BR KO HK IN SP TH MY ID PH
Source: Bloomberg - WIRA; monthly data November/December 2014
61
07
08
09
10
11
12
13
Asia Equity Derivatives Strategy: Guillaume Derville, Winner Lee, Shun Maruyama, Shuai Chen
Flow Sales: Hong Kong: (852) 2108 5639, Singapore: (65) 6210 1883
14
15
NOT F or
Now
Dec-14
Mar-15
Jun-15
Sep-15
Dec-15
Mar 15 QoQ
Jun 15 QoQ
Sep 15 QoQ
Dec 15 QoQ
Now to Dec-14
Now to Mar-15
Now to Jun-15
Now to Sep-15
Now to Dec-15
Equities
2003
3008
16876
37.92
2050
3250
18000
41.00
2075
3400
17000
42.00
2100
3500
16000
41.00
2175
3400
17000
42.00
2250
3500
18000
43.00
1.2%
4.6%
-5.6%
2.4%
1.2%
2.9%
-5.9%
-2.4%
3.6%
-2.9%
6.3%
2.4%
3.4%
2.9%
5.9%
2.4%
2.4%
8.0%
6.7%
8.1%
3.6%
13.0%
0.7%
10.8%
4.9%
16.4%
-5.2%
8.1%
8.6%
13.0%
0.7%
10.8%
12.4%
16.4%
6.7%
13.4%
FX
EURUSD
EURJPY
EURGBP
USDJPY
GBPUSD
USDRMB
1.19
141
0.78
119
1.51
6.21
1.22
142
0.77
116
1.58
6.10
1.20
142
0.75
118
1.60
6.08
1.18
144
0.74
122
1.59
6.12
1.16
145
0.73
125
1.59
6.10
1.15
147
0.72
128
1.60
6.05
-1.6%
0.0%
-2.6%
1.7%
1.3%
-0.3%
-1.7%
1.4%
-1.3%
3.4%
-0.6%
0.7%
-1.7%
0.7%
-1.4%
2.5%
0.0%
-0.3%
-0.9%
1.4%
-1.4%
2.4%
0.6%
-0.8%
2.7%
0.6%
-1.8%
-2.4%
4.3%
-1.8%
1.0%
0.6%
-4.4%
-0.7%
5.7%
-2.1%
-0.7%
2.0%
-5.7%
2.6%
5.0%
-1.4%
-2.3%
2.7%
-6.9%
5.1%
5.0%
-1.8%
-3.2%
4.1%
-8.2%
7.7%
5.7%
-2.6%
Fed Funds
UST 2Y
UST 10Y
2s10s
0.25
0.63
1.94
1.32
0-0.25
0.60
2.35
1.75
0
30
15
-15
25
40
15
-25
25
25
5
-20
25
20
5
-15
0
-3
41
43
0
27
56
28
25
67
71
3
50
92
76
-17
75
112
81
-32
0.05
(0.11)
0.44
0.05
(0.10)
0.85
0.05
(0.10)
1.20
0.05
(0.05)
1.20
0.05
(0.05)
1.10
0.05
(0.05)
1.00
0
0
35
0
5
0
0
0
-10
0
0
-10
0
1
41
0
1
76
0
6
76
0
6
66
0
6
56
48
51
6145
1217
54
59
6,735
1,195
68
75
6,600
1,135
65
73
6,450
1,025
70
75
6,300
1,000
75
83
6,500
960
25.9%
27.1%
-2.0%
-5.0%
-4.4%
-2.7%
-2.3%
-9.7%
7.7%
2.7%
-2.3%
-2.4%
7.1%
10.7%
3.2%
-4.0%
-0.6%
-0.5%
5.2%
-0.4%
41.8%
47.2%
7.4%
-6.7%
35.5%
43.3%
5.0%
-15.8%
46.0%
47.2%
2.5%
-17.8%
56.4%
62.9%
5.8%
-21.1%
Commo
Eurozone
SPX
SX5E
NKY
EEM
US
Refi
2Y
10Y
WTI
Brent
Copper
Gold
CPI
GDP
US
2.3
2.1
3.3
2.9
Eurozone
0.8
0.6
0.4
0.6
Japan
-1.2
-0.2
-1.6
0.4
US
1.8
1.4
0.9
0.6
Eurozone
0.4
0.4
0.4
0.4
Japan
3.3
2.8
2.6
0.8
Sources: Bloomberg; BNP Paribas; data as of 6 January 2015
2.7
0.9
1.1
1.4
0.5
0.9
2.8
1.2
0.7
2.6
0.8
1.4
Flows matter
According to Investment Company Institute (www.ici.org), US equities suffered net
outflows (USD18b) over the past two months. US equities experienced USD52.2b in total
outflows YTD, while the world ex-US equities enjoyed UDS88.6b worth of inflows.
Overall, world equities absorbed a total of USD42.9b YTD, while world bonds gained
USD36.4b and hybrid funds USD26b.
US equities
World ex US equities
10
5
0
(5)
(10)
(15)
(20)
Jan-14
Apr-14
Jul-14
Oct-14
62
Equity
Apr-14
Hybrid
Jul-14
Bond
Oct-14
Asia Equity Derivatives Strategy: Guillaume Derville, Winner Lee, Shun Maruyama, Shuai Chen
Flow Sales: Hong Kong: (852) 2108 5639, Singapore: (65) 6210 1883
NOT F or
In the fourth quarter, Japan received significant foreign inflows (USD8.7b), mainly due to
the positive BoJ QQE sentiment. In the fourth quarter, India continued to absorb net
inflows (USD2.3b), enlarging its YTD inflows to USD16.1b; the country enjoyed the
highest inflows among the Asia ex-Japan universe. Korean equities weakness in 4Q was
due to net outflows of USD2.7b. Overall, despite the ADXY index weakness, we didnt
witness dramatic equity or bond outflows in the last quarter of 2014.
Foreign investors net buying/selling of equities
USD b
2008
2009
2010
2011
2012
2013
2014
1Q14
2Q14
3Q14
4Q14
Since
2009
TW
(14.8)
14.8
9.2
(9.5)
4.9
8.3
11.8
2.6
6.8
0.6
1.7
39.4
KO
(33.3)
24.8
19.0
(7.2)
15.0
3.2
4.8
(3.3)
5.6
5.2
(2.7)
59.6
TH
(4.8)
1.1
2.7
(0.2)
2.5
(6.2)
(1.1)
(0.6)
(0.6)
1.2
(1.0)
(1.1)
ID
1.7
1.4
2.4
2.9
1.7
(1.8)
3.8
2.1
1.7
0.4
(0.5)
10.4
PH
(1.1)
0.4
1.2
1.3
2.5
0.7
1.3
0.4
0.6
0.3
(0.1)
7.5
IN
(12.7)
17.6
29.3
(0.5)
24.5
20.0
16.1
4.1
5.8
3.9
2.3
107.1
JP
(33.1)
17.1
38.0
22.3
34.2
152.8
6.6
(17.5)
8.8
6.5
8.7
270.9
Asia-7 (98.2)
77.3
101.8
9.2
85.4
176.9
43.2
(12.1)
28.7
18.1
8.5
493.8
Brazil
10.1
1.9
(0.1)
3.3
5.1
8.8
1.4
4.0
4.2
(0.8)
29.1
(13.3)
2008
2009
2010
2011
2012
2013
2014
1Q14
2Q14
3Q14
4Q14
Since
2009
KO
27.7
33.4
37.3
35.4
4.6
11.5
8.4
11.0
133.8
IN
2.7
1.2
10.1
8.5
6.9
(8.5)
26.3
6.1
4.3
9.3
6.6
44.5
MY
0.4
3.5
10.2
9.5
8.9
2.6
2.6
1.1
2.0
0.8
(1.4)
37.2
TH
11.8
24.2
29.3
14.1
6.5
0.0
2.2
4.0
0.3
85.8
JP
(40.4)
(75.4)
7.5
55.7
29.5
(32.9)
87.8
(3.7)
3.5
41.6
46.5
72.3
Asia
(37.3)
(70.7)
39.4
125.7
108.0
12.5
158.6
8.1
23.4
64.0
63.1
373.6
63
Asia Equity Derivatives Strategy: Guillaume Derville, Winner Lee, Shun Maruyama, Shuai Chen
Flow Sales: Hong Kong: (852) 2108 5639, Singapore: (65) 6210 1883
NOT F or
Fed
BoJ
ECB
6000
5000
4,000
4000
3,000
3000
2,000
2000
1,000
1000
0
0
2007 2008 2009 2010 2011 2012 2013 2014
02 03 04 05 06 07 08 09 10 11 12 13 14
Debt as % of GDP
(% GDP)
250
(y-y %)
15.0
226.1
175
200
10.0
133
150
124.2
91.1
100
5.0
79.9
72
0.0
50
(5.0)
US
Germany
UK
Ireland
Italy
Greece
Japan
64
(10.0)
2005 2006 2007 2008 2009 2010 2011 2012 2013 2014
Source: Bloomberg, monthly data as of November 2014
Asia Equity Derivatives Strategy: Guillaume Derville, Winner Lee, Shun Maruyama, Shuai Chen
Flow Sales: Hong Kong: (852) 2108 5639, Singapore: (65) 6210 1883
NOT F or
China
29.6
31.6
33.8
41.4
46.6
48.2
50.4
53.6
54.5
54.3
52.3
53.8
52.5
52.5
52.4
53.8
54.7
53.9
52.8
50.1
49.5
47.2
47.3
48.3
51.4
52.9
46.4
45.7
51.3
50.7
52.1
51.9
49.3
50.6
49.1
50.2
50.7
50.5
51.1
50.7
50.7
49.9
47.9
47.7
48.0
46.9
46.5
45.0
47.7
48.5
50.4
51.1
51.5
52.3
50.7
52.2
52.5
54.2
55.1
55.2
56.6
55.5
53.9
49.4
49.9
51.5
50.5
52.2
51.7
52.4
52.0
52.1
42.2
45.1
44.8
50.1
51.2
51.8
52.8
55.1
55.0
55.4
55.7
56.1
57.4
55.8
57.0
55.2
52.7
50.4
49.4
51.9
52.9
54.8
55.3
54.4
54.5
51.7
51.8
51.8
51.6
50.1
49.3
49.9
49.9
51.0
47.7
48.7
48.8
49.6
48.3
49.3
48.4
48.2
49.3
47.6
47.9
49.5
50.5
51.5
52.3
50.4
51.6
50.4
49.2
48.2
47.7
50.1
50.2
50.9
50.8
50.5
49.5
48.5
48.0
48.1
49.4
50.7
51.7
50.2
50.2
50.4
50.0
49.6
South Korea
39.7
44.9
50.7
51.2
51.2
52.0
54.0
53.6
52.7
52.5
52.6
52.8
55.6
58.2
55.6
57.1
54.6
53.3
53.2
50.9
48.8
46.7
50.2
53.9
53.5
53.4
52.8
51.7
51.2
51.1
51.3
49.7
47.5
48.0
47.1
46.4
49.2
50.7
52.0
51.9
51.0
49.4
47.2
47.5
45.7
47.4
48.2
50.1
49.9
50.9
52.0
52.6
51.1
49.4
47.2
47.5
49.7
50.2
50.4
50.8
50.9
49.8
50.4
50.2
49.5
48.4
49.3
50.3
48.8
48.7
49.0
49.9
India
46.7
47.0
49.5
53.3
55.7
55.3
55.3
53.2
55.0
54.5
53.0
55.6
57.6
58.5
57.8
57.2
59.0
57.3
57.6
57.2
55.1
57.2
58.4
56.7
56.8
57.9
57.9
58.0
57.5
55.3
53.6
52.6
50.4
52.0
51.0
54.2
57.5
56.6
54.7
54.9
54.8
55.0
52.9
52.8
52.8
52.9
53.7
54.7
53.2
54.2
52.0
51.0
50.1
50.3
50.1
48.5
49.6
49.6
51.3
50.7
51.4
52.5
51.3
51.3
51.4
51.5
53.0
52.4
51.0
51.6
53.3
54.5
Australia
36.5
30.9
33.4
31.2
37.6
38.4
44.4
50.3
51.0
49.9
50.7
46.2
51.6
55.8
50.5
59.8
56.3
52.9
54.4
51.7
47.3
49.4
47.6
46.3
46.7
51.1
47.9
48.4
47.7
52.9
43.4
43.3
42.3
47.4
47.8
50.2
51.6
51.3
49.5
43.9
42.4
47.2
40.3
45.3
44.1
45.2
44.3
44.3
40.2
45.6
44.4
36.7
43.8
49.6
42.0
46.4
51.7
53.2
47.7
47.6
46.7
48.6
47.9
44.8
49.2
48.9
50.7
47.3
46.5
49.4
50.1
46.9
US
Eurozone
34.9
35.5
36.0
39.5
41.7
45.8
49.9
53.5
54.4
56.0
54.4
55.3
56.6
55.7
59.3
58.9
57.8
56.1
56.4
57.8
56.5
57.3
58.2
57.3
59.2
59.6
59.3
59.4
53.5
55.8
52.3
53.2
53.2
51.5
52.3
52.9
53.7
51.9
53.3
54.1
52.5
50.2
50.5
50.7
51.6
51.7
49.9
50.2
53.1
54.2
51.3
50.7
49.0
50.9
55.4
55.7
56.2
56.4
57.3
57.0
51.3
57.1
55.5
55.4
56.4
57.3
55.8
57.9
57.5
55.9
54.7
53.9
34.4
33.5
33.9
36.8
40.7
42.6
46.3
48.2
49.3
50.7
51.2
51.6
52.4
54.2
56.6
57.6
55.8
55.6
56.7
55.1
53.7
54.6
55.3
57.1
57.3
59.0
57.5
58.0
54.6
52.0
50.4
49.0
48.5
47.1
46.4
46.9
48.8
49.0
47.7
45.9
45.1
45.1
44.0
45.1
46.1
45.4
46.2
46.1
47.9
47.9
46.8
46.7
48.3
48.8
50.3
51.4
51.1
51.3
51.6
52.7
54.0
53.2
53.0
53.4
52.2
51.8
51.8
50.7
50.3
50.6
50.4
50.6
Germany
32.0
32.1
32.4
35.4
39.6
40.9
45.7
49.2
49.6
51.0
52.4
52.7
53.7
57.2
60.2
61.5
58.4
58.4
61.2
58.2
55.1
56.6
58.1
60.7
60.5
62.7
60.9
62.0
57.7
54.6
52.0
50.9
50.3
49.1
47.9
48.4
51.0
50.2
48.4
46.2
45.2
45.0
43.0
44.7
47.4
46.0
46.8
46.0
49.8
50.3
49.0
48.1
49.4
48.6
50.7
51.8
51.1
51.7
52.7
54.3
56.5
54.8
53.7
54.1
52.3
52.0
52.4
51.4
49.9
51.4
50.0
51.2
France
37.9
34.8
36.5
40.1
43.3
45.9
48.1
50.8
53.0
55.6
54.4
54.7
55.4
54.9
56.5
56.6
55.8
54.8
53.9
55.1
56.0
55.2
57.9
57.2
54.9
55.7
55.4
57.5
54.9
52.5
50.5
49.1
48.2
48.5
47.3
48.9
48.5
50.0
46.7
46.9
44.7
45.2
43.4
46.0
42.7
43.7
44.5
44.6
42.9
43.9
44.0
44.4
46.4
48.4
49.7
49.7
49.8
49.1
48.4
47.0
49.3
49.7
52.1
51.2
49.6
48.2
47.8
46.9
48.8
48.5
47.6
47.5
65
Asia Equity Derivatives Strategy: Guillaume Derville, Winner Lee, Shun Maruyama, Shuai Chen
Flow Sales: Hong Kong: (852) 2108 5639, Singapore: (65) 6210 1883
Italy
36.1
35.0
34.6
37.2
41.1
42.7
45.4
44.2
47.6
49.2
50.1
50.8
51.7
51.6
53.7
54.3
54.0
54.3
54.4
52.8
52.6
53.0
52.0
54.7
56.6
59.0
56.2
55.5
52.8
49.8
50.1
47.0
48.3
43.3
44.0
44.3
46.8
47.8
47.9
43.8
44.8
44.6
44.3
43.6
45.7
45.5
45.1
46.7
47.8
45.8
44.5
45.5
47.3
49.1
50.4
51.3
50.8
50.7
51.4
53.3
53.1
52.3
52.4
54.0
53.2
52.6
51.9
49.8
50.7
49.0
49.0
48.4
Spain
31.5
31.8
32.9
34.6
39.8
42.8
47.3
47.2
45.8
46.3
45.3
45.2
45.3
49.1
51.8
53.3
51.5
51.2
51.6
51.2
49.6
51.2
50.0
51.5
52.0
52.1
51.6
50.6
48.2
47.3
45.6
45.3
43.7
43.9
43.8
43.7
45.1
45.0
44.5
43.5
42.0
41.1
42.3
44.0
44.5
43.5
45.3
44.6
46.1
46.8
44.2
44.7
48.1
50.0
49.8
51.1
50.7
50.9
48.6
50.8
52.2
52.5
52.8
52.7
52.9
54.6
53.9
52.8
52.6
52.6
54.7
53.8
NOT F or
China
0.0
-0.1
-0.3
-0.1
-1.1
-1.8
-2.2
-2.2
-2.2
-2.5
-1.9
-1.7
-1.3
-1.1
-1.1
-1.2
-0.9
-0.7
-0.9
-0.9
-0.6
0.2
0.1
0.0
-0.6
-0.5
-0.5
-0.4
-0.4
-0.4
0.2
0.2
0.0
-0.2
-0.5
-0.2
0.1
0.3
0.5
0.4
0.2
-0.2
-0.4
-0.4
-0.3
-0.4
-0.2
-0.1
-0.3
-0.7
-0.9
-0.7
-0.3
0.2
0.7
0.9
1.1
1.1
1.5
1.6
1.4
1.5
1.6
3.4
3.7
3.6
3.4
3.3
3.2
2.9
2.4
1.0
-1.6
-1.2
-1.5
-1.4
-1.7
-1.8
-1.2
-0.8
-0.5
0.6
1.9
1.5
2.7
2.4
2.8
3.1
2.9
3.3
3.5
3.6
4.4
5.1
4.6
4.9
4.9
5.4
5.3
5.5
6.4
6.5
6.2
6.1
5.5
4.2
4.1
4.5
3.2
3.6
3.4
3.0
2.2
1.8
2.0
1.9
1.7
2.0
2.5
2.0
3.2
2.1
2.4
2.1
2.7
2.7
2.6
3.1
3.2
3.0
2.5
2.5
2.0
2.4
1.8
2.5
2.3
2.3
2.0
1.6
1.6
1.4
South Korea
3.7
4.1
3.9
3.6
2.7
2.0
1.6
2.2
2.2
2.0
2.4
2.8
3.5
3.0
2.5
2.6
2.7
2.7
2.5
2.7
3.4
3.7
3.0
3.0
3.4
3.9
4.1
3.8
3.9
4.2
4.5
4.7
3.8
3.6
4.2
4.2
3.3
3.0
2.7
2.6
2.5
2.2
1.5
1.3
2.1
2.1
1.6
1.4
1.6
1.6
1.5
1.3
1.1
1.2
1.6
1.5
1.0
0.9
1.2
1.1
1.1
1.0
1.3
1.5
1.7
1.7
1.6
1.4
1.1
1.2
1.0
0.8
India
5.9
3.6
1.7
1.2
1.5
-0.4
-0.3
0.5
1.4
1.8
4.7
7.2
8.7
9.7
10.4
10.9
10.5
10.3
10.0
8.9
9.0
9.1
8.2
9.5
9.5
9.5
9.7
9.7
9.6
9.5
9.4
9.8
10.0
9.9
9.5
7.7
7.2
7.6
7.7
7.5
7.6
7.6
7.5
8.0
8.1
7.3
7.2
7.3
7.3
7.3
5.7
4.8
4.6
5.2
5.9
7.0
7.1
7.2
7.5
6.4
5.1
5.0
6.0
5.6
6.2
5.7
5.4
3.9
2.4
1.8
0.0
Australia
2.4
1.4
1.2
2.1
2.9
3.1
2.9
2.8
3.3
3.5
3.4
3.0
1.6
1.2
2.0
2.2
2.5
2.4
2.2
2.7
2.9
3.0
2.3
US
Eurozone
0.0
0.2
-0.4
-0.7
-1.3
-1.4
-2.1
-1.5
-1.3
-0.2
1.8
2.7
2.6
2.1
2.3
2.2
2.0
1.1
1.2
1.1
1.1
1.2
1.1
1.5
1.6
2.1
2.7
3.2
3.6
3.6
3.6
3.8
3.9
3.5
3.4
3.0
2.9
2.9
2.7
2.3
1.7
1.7
1.4
1.7
2.0
2.2
1.8
1.7
1.6
2.0
1.5
1.1
1.4
1.8
2.0
1.5
1.2
1.0
1.2
1.5
1.6
1.1
1.5
2.0
2.1
2.1
2.0
1.7
1.7
1.7
1.3
1.1
1.2
0.6
0.6
0.0
-0.1
-0.6
-0.2
-0.3
-0.1
0.5
0.9
0.9
0.8
1.6
1.6
1.7
1.5
1.7
1.6
1.9
1.9
1.9
2.2
2.3
2.4
2.7
2.8
2.7
2.7
2.6
2.5
3.0
3.0
3.0
2.7
2.7
2.7
2.7
2.6
2.4
2.4
2.4
2.6
2.6
2.5
2.2
2.2
2.0
1.8
1.7
1.2
1.4
1.6
1.6
1.3
1.1
0.7
0.9
0.8
0.8
0.7
0.5
0.7
0.5
0.5
0.4
0.4
0.3
0.4
0.3
Germany
0.9
1.1
0.4
0.7
0.0
0.1
-0.5
0.0
-0.2
0.0
0.4
0.8
0.7
0.5
1.2
1.2
1.2
0.9
1.1
1.0
1.2
1.3
1.5
1.3
1.7
1.9
2.0
1.9
2.0
2.1
2.1
2.1
2.4
2.3
2.4
2.0
2.1
2.2
2.2
2.0
2.0
1.7
1.9
2.2
2.0
2.0
1.9
2.0
1.7
1.5
1.4
1.2
1.5
1.8
1.9
1.5
1.4
1.2
1.3
1.4
1.3
1.2
1.0
1.3
0.9
1.0
0.8
0.8
0.8
0.8
0.6
0.2
France
0.7
0.9
0.3
0.1
-0.3
-0.5
-0.7
-0.2
-0.4
-0.2
0.4
0.9
1.1
1.3
1.6
1.7
1.6
1.5
1.7
1.4
1.6
1.6
1.6
1.8
1.8
1.7
2.0
2.1
2.0
2.1
1.9
2.2
2.2
2.3
2.5
2.5
2.3
2.3
2.3
2.1
2.0
1.9
1.9
2.1
1.9
1.9
1.4
1.3
1.2
1.0
1.0
0.7
0.8
0.9
1.1
0.9
0.9
0.6
0.7
0.7
0.7
0.9
0.6
0.7
0.7
0.5
0.5
0.4
0.3
0.5
0.3
66
Asia Equity Derivatives Strategy: Guillaume Derville, Winner Lee, Shun Maruyama, Shuai Chen
Flow Sales: Hong Kong: (852) 2108 5639, Singapore: (65) 6210 1883
Italy
Spain
1.6
1.6
1.2
1.2
0.9
0.5
0.0
0.1
0.2
0.3
0.7
1.0
1.3
1.2
1.4
1.5
1.4
1.3
1.7
1.6
1.6
1.7
1.7
1.9
2.1
2.4
2.5
2.6
2.6
2.7
2.7
2.8
3.0
3.4
3.3
3.3
3.2
3.3
3.3
3.3
3.2
3.3
3.1
3.2
3.2
2.6
2.5
2.3
2.2
1.9
1.6
1.1
1.1
1.2
1.2
1.2
0.9
0.8
0.7
0.7
0.7
0.5
0.4
0.6
0.5
0.3
0.1
-0.1
-0.2
0.1
0.2
0.8
0.7
-0.1
-0.2
-0.9
-1.0
-1.4
-0.8
-1.0
-0.7
0.3
0.8
1.0
0.8
1.4
1.5
1.8
1.5
1.9
1.8
2.1
2.3
2.3
3.0
3.3
3.6
3.6
3.8
3.5
3.2
3.1
3.0
3.1
3.0
2.9
2.4
2.0
2.0
1.9
2.1
1.9
1.9
2.2
2.7
3.4
3.5
2.9
2.9
2.7
2.8
2.4
1.4
1.7
2.1
1.8
1.5
0.3
-0.1
0.2
0.3
0.2
0.0
-0.1
0.4
0.2
0.1
-0.3
-0.5
-0.2
-0.1
-0.4
-1.1
NOT F or
VIX
50
V2X
45
40
35
30
25
20
15
10
Jan-13
Jul-13
Jan-14
Jul-14
Jan-15
(vol-point)
8
7
6
5
4
3
2
1
0
(1)
2008
2009
30
28
26
24
22
20
18
16
14
12
10
2011
2012
NKY
2013
2014
SPX
SX5E
NKY
HSCEI
KOSPI2
AS51
High IV
High Skew
DAX
AS51
SX5E
6.0
2.0
KOSPI2
Low IV
Low Skew
0.0
(2.0)
3M
6M
9M
12M
18M
24M
36M
NIFTY
TWSE
4.0
2M
2015
8.0
1M
67
2010
SX5E
Kospi2
SPX
HSCEI
10
15
NKY
High IV
Low Skew
HSI
HSCEI
20
25
3M ATM IV (vol-pt)
Asia Equity Derivatives Strategy: Guillaume Derville, Winner Lee, Shun Maruyama, Shuai Chen
Flow Sales: Hong Kong: (852) 2108 5639, Singapore: (65) 6210 1883
30
NOT F or
Buy Mar-15 95/85% AS51 Put Spread at 1.15% (delta -21%) and sell Mar-15
95/85% HSCEI Put Spread at 2.01% (delta -21.5%)
120%
110%
115%
100%
110%
90%
105%
80%
100%
70%
95%
Iron Ores
Iron Ores,
22.6%
Other Goods
& Services,
52.4%
Coal, 12.1%
Gold, 4.0%
60%
Jul 12
90%
Jan 13
Jul 13
Jan 14
Jul 14
In 2H14, commodity prices fell by 25.4%, dragging the AS51 Material Index by only
9.3%; while financials, up 3.0%, outperformed the AS51 index. They saved the AS51
index from falling.
AS51 Materials corrected 14% YTD
(Index, Jan-13=100))
S&P/ASX 200
S&P/ASX 200 Financial
140.0
130.0
(Index, Jan-13=100))
110.0
105.0
100.0
120.0
95.0
110.0
90.0
100.0
85.0
90.0
80.0
80.0
75.0
70.0
Jan-13
Jul-13
Jan-14
Jul-14
68
Jan-15
70.0
Jan-13
Jul-13
Jan-14
Jul-14
Asia Equity Derivatives Strategy: Guillaume Derville, Winner Lee, Shun Maruyama, Shuai Chen
Flow Sales: Hong Kong: (852) 2108 5639, Singapore: (65) 6210 1883
Jan-15
NOT F or
2000
1.05
1000
1.00
0.95
(1000)
0.90
(2000)
0.85
(3000)
0.80
(4000)
00 01 02 03 04 05 06 07 08 09 10 11 12 13 14
Source: Bloomberg; monthly data as of October 2014
0.75
Jan-13
Jul-13
Jan-14
69
Jul-14
Asia Equity Derivatives Strategy: Guillaume Derville, Winner Lee, Shun Maruyama, Shuai Chen
Flow Sales: Hong Kong: (852) 2108 5639, Singapore: (65) 6210 1883
Jan-15
NOT F or
AS51 (LHS)
7500
7000
(AUD)
500
6000
400
5500
5000
350
4500
4000
300
3500
3000
250
05
06
07
08
09
10
11
12
13
24
22
5500
20
5000
18
4500
16
4000
14
3500
12
3000
10
05
06
07
08
09
10
11
12
13
14
(USD))
(HKD)
1600
HSCEI Bloomberg Estimated EPS (RHS)
1700.0
1400
1600.0
1200
1500.0
1000
1400.0
800
1300.0
600
1200.0
400
1100.0
Jan-14
HSCEI (LHS)
(USD))
5400
5200
5000
4800
4600
05
06
07
08
09
10
11
12
13
14
(Index)
4200
Apr-14
Jul-14
4000
Jan-15
Oct-14
35
4400
80.0%
30
60.0%
25
40.0%
20.0%
20
0.0%
15
-20.0%
10
-40.0%
-60.0%
-80.0%
05
06
07
08
09
10
11
12
13
14
05
06
07
08
09
10
11
12
13
Risk parameters
The HSCEI implied volatility term structure turned downward sloping after interest rates
were cut on 21 November. Short-dated volatilities spiked. The AS51 implied volatility
term structure remains upward sloping and continues to trend lower. AS51 skews remain
relatively elevated indicating downside volatility demand; this has been confirmed by
active put purchases in the listed option market since mid-December.
70
26
6000
23000
21000
19000
17000
15000
13000
11000
9000
7000
5000
3000
(%)
28
6500
14
(Index)
AS51 (LHS)
7500
7000
450
6500
(Index)
Asia Equity Derivatives Strategy: Guillaume Derville, Winner Lee, Shun Maruyama, Shuai Chen
Flow Sales: Hong Kong: (852) 2108 5639, Singapore: (65) 6210 1883
14
NOT F or
Derivatives strategy
Given the large implied volatility gap between HSCEI and AS51, selling AS51 calls in
order to fund buying HSCEI calls doesnt seem attractive. As mentioned previously,
HSCEI should outperform AS51 under a bull case scenario; we therefore suggest
investors consider buying the outperformance on HSCEI over AS51 on the condition that
the HSCEI return > 0. The downside risk of an outperformance call is capped at the
premium paid. A cheap way to play the outperformance HSCEI vs. AS51 in a correction
scenario would be to sell HSCEI Put Spread, monetising the flat downside skew, and at
the same time buy AS51 Put Spread taking advantage of a steep downside skew.
HSCEI vs. AS51 3M 90-110% Skew
(vol-point)
14
12
10
8
6
4
2
0
(2)
(4)
2008
2009
2010
2011
2012
2013
2014
2015
(No of contract)
Call Volume
Put Volume
90000
80000
70000
60000
50000
40000
30000
20000
10000
0
Jul-14 Aug-14 Sep-14 Oct-14 Nov-14 Dec-14 Jan-15
Sources: Bloomberg, BNP Paribas; data as of 2 January 2015
30
28
26
24
22
20
18
16
14
12
10
(%)
85
75
65
55
45
35
25
1M
2M
3M
6M
9M
12M
18M
24M
36M
15
2007
2008
2010
2011
2012
2013
2014
2015
2009
35
(vol-point)
8.0
7.0
30
6.0
5.0
25
4.0
20
3.0
2.0
15
1.0
10
1M
2M
3M
6M
9M
12M
18M
24M
71
36M
0.0
2008
2009
2010
2011
2012
Asia Equity Derivatives Strategy: Guillaume Derville, Winner Lee, Shun Maruyama, Shuai Chen
Flow Sales: Hong Kong: (852) 2108 5639, Singapore: (65) 6210 1883
2013
2014
2015
NOT F or
Buy Mar-15 95% Best-of Put on AS51, TWSE and HSI at 0.53%
Buy Mar-15 95% Best-of Put on AS51, TWSE and NKY at 0.52%
Buy Mar-15 95% Best-of Put on AS51, TWSE and Kospi2 at 0.42%
Note: Quanto USD and 30-March-2015 maturity
EDS Asia discussed the theme USD strength vs. JPY weakness and carry-trades
unwind in our 4Q14 strategy The Tipping Point (dated 9 October 2014). The US dollar
strength hurt emerging market currencies and equities in the fourth quarter of 2014.
Since the start of the US quantitative easing process in 2009, investors have been
borrowing US dollars to fund riskier asset investments (EM currencies and equities, as
well as commodities). The start of the tapering rhetoric in mid-2013 by the Federal
Reserve initiated the US dollar carry trades unwinding process. In 2014, EM (emerging
markets) underperformed DM (developed markets) equities. The US dollar carry trades
unwind process combined with an intensifying currency war, where Japan is exporting
deflation through a violent debasement of its yen currency, might end in a currency
crisis. We believe the recent collapse of the ruble represents collateral damage of the
above mentioned process.
Potential Contagion
Asia ex-Japan equities are holding up relatively well; we only witnessed marginal equity
outflows from Korea, Thailand, Indonesia and the Philippines in 4Q14. In the emerging
world, Russia and Brazil have been the most affected heavyweights recently, indicated
by the underperformance of MSCI EM (MXEF Index) and MSCI EM ex-Asia (MXEFZ
Index) vs. the MSCI Asia-ex Japan index (MXASJ Index). We believe waves of carry
trade unwinds will keep weighing on emerging assets. At some stage Asian equities
might be affected as we should witness contagion effects under which risk-off could
spread to the Asia Pacific equities space.
ADXY vs. MSCI Asia ex Japan
(Index)
650
600
550
500
450
400
350
300
250
200
2008
ADXY (RHS)
(Index)
(Index)
MSCI EM (LHS)
120.0
115
100.0
110
80.0
100
60.0
110
105
2009
2010
2011
2012
2013
2014
100
2015
95
90
40.0
80
2009
2010
2011
2012
2013
2014
Asian hidden assets are offering interesting risk-parameter features, which can be used
to build short-term global hedges:
Low Index Volatilities: Among Asian indices, AS51, Kospi2, TWSE, Nifty and HSI
have relatively lower implied volatilities. These distortions are explained by investor
bullishness (AS51 and TWSE) and extensive structured product activity (Kospi2).
The Nifty falls into the low volatility space, but its volatility is illiquid (especially in
medium- to long-term maturities).
72
85
20.0
0.0
2008
105
Asia Equity Derivatives Strategy: Guillaume Derville, Winner Lee, Shun Maruyama, Shuai Chen
Flow Sales: Hong Kong: (852) 2108 5639, Singapore: (65) 6210 1883
75
2015
NOT F or
(40-50 correl-pt); in the past (2008 Lehman crisis, 2011 European financial and debt
crisis), the risk-aversion spike has been associated with global and regional equities
collapsing in tandem.
Asian indices as a global risk-off hedge
Investors should consider buying a Best-of-Put on an Asian indices basket (AS51TWSE-HSI or AS51-TWSE-NKY or AS51-TWSE-Kospi2). The strategy is long volatility,
long correlation and short delta; it takes advantage of current risk parameter distortions.
The breakeven of this strategy requires the best performer to lose by more than
5%+premium; while the risk is capped at the premium paid.
3M 90-110% skew vs. 3M ATM IV
3M 90-110% Skew (vol-pt)
14.0
Low IV
SPX
12.0
High Skew
10.0
(vol-pt)
High IV
High Skew
DAX
NIFTY
TWSE
2.0
KOSPI2
Low IV
Low Skew
0.0
(2.0)
10
15
NKY
High IV
Low Skew
AS51
70
40
30
HSI
20
HSCEI
20
25
3M ATM IV (vol-pt)
30
10
2008
2009
2010
2011
2012
2013
2014
2015
TWSE
50
(vol-pt)
Kospi2
60
SX5E
6.0
4.0
HSI
80
AS51
8.0
AS51
100
(%)
90.0
90
80.0
80
70
70.0
60
60.0
50
50.0
40
40.0
30
30.0
20
10
2008
2009
2010
2011
2012
2013
2014
2015
20.0
2007 2008 2009 2010 2011 2012 2013 2014 2015
Source: BNP Paribas; data as of 6 January 2015
90.0
90.0
80.0
80.0
70.0
70.0
60.0
60.0
50.0
50.0
40.0
40.0
30.0
30.0
20.0
2007 2008 2009 2010 2011 2012 2013 2014 2015
20.0
2007 2008 2009 2010 2011 2012 2013 2014 2015
73
Asia Equity Derivatives Strategy: Guillaume Derville, Winner Lee, Shun Maruyama, Shuai Chen
Flow Sales: Hong Kong: (852) 2108 5639, Singapore: (65) 6210 1883
NOT F or
Buy Feb-15 95/85% Put Spread on Nifty Index at 75bp (delta -14%)
MSCI EM
(USD b)
120.0
100.0
250.0
550
80.0
200.0
60.0
150.0
40.0
500
450
400
350
20.0
100.0
74
300
0.0
50.0
Jan-09 Jan-10 Jan-11 Jan-12 Jan-13 Jan-14 Jan-15
(20.0)
2009
(Index)
650
600
250
2010
2011
2012
2013
2014
Asia Equity Derivatives Strategy: Guillaume Derville, Winner Lee, Shun Maruyama, Shuai Chen
Flow Sales: Hong Kong: (852) 2108 5639, Singapore: (65) 6210 1883
200
2015
NOT F or
The liquidity on Nifty option market remains tight, BNP Paribas Index Trading can
provide liquidity on the following axe:
Buy Dec-17 ATM Put on Nifty at 6.8% (delta -25%, iv 19.5 vol-pt)
Sell Dec-16 105% Call and Buy 95% Put Nifty receives 8.25% (delta 86%)
Sell Dec-17 105% Call and Buy 95% Put on Nifty receives 11.6% (delta 89%)
NIFTY (LHS)
8000
(INR)
NIFTY Bloomberg Estimated EPS (RHS) 500
450
7000
400
9000
6000
350
5000
NIFTY (LHS)
9000
8000
7000
6000
5000
300
4000
4000
3000
250
2000
200
2000
150
1000
1000
05
06
07
08
09
10
11
12
13
3000
14
05
08
09
10
11
12
13
14
07
08
09
10
11
12
13
14
350.0
65.0
60.0
250.0
200.0
55.0
150.0
50.0
100.0
45.0
50.0
0.0
00 01 02 03 04 05 06 07 08 09 10 11 12 13 14
Sources: Bloomberg; BNP Paribas; weekly data as of 5 December 2015
75
15
(USD b)
300.0
07
06
(%)
30
28
26
24
22
20
18
16
14
12
10
40.0
07
08
09
10
11
12
13
Asia Equity Derivatives Strategy: Guillaume Derville, Winner Lee, Shun Maruyama, Shuai Chen
Flow Sales: Hong Kong: (852) 2108 5639, Singapore: (65) 6210 1883
14
NOT F or
(vol-pt)
(vol-pt)
Current
19.0
18.0
17.0
16.0
15.0
14.0
13.0
12.0
11.0
10.0
1-wk ago
1-mth ago
90
Nifty 3M IV
80
70
60
50
40
30
20
1M
2M
3M
6M
9M
10
2008
2009
(vol-point)
(vol-point)
3M 90-110% Skew
2013
2014
2015
80-95% Skew
Skew
3M3M80-95%
11.0
10.0
9
8
9.0
8.0
7.0
6.0
5.0
3
2009
2010
2011
2012
76
2012
10
2
2008
2011
11
2010
2013
2014
2015
4.0
2008
2009
2010
2011
2012
Asia Equity Derivatives Strategy: Guillaume Derville, Winner Lee, Shun Maruyama, Shuai Chen
Flow Sales: Hong Kong: (852) 2108 5639, Singapore: (65) 6210 1883
2013
2014
2015
NOT F or
Buy every month a 3M 100/104 call spread on Asian Index Basket and sell a
3M 100/104 call spread on SPX Index with 0% floor overall payoff offered at
4.4%
Maturity: Jun 16 (18 months maturity = 16 monthly rolling swaplets of 3 months)
Execute it in a statistical way by rolling it every month until maturity
Floor overall P&L to avoid unexpected loss
Retail investor activities are pushing Asia volatility and skew lower: In Asian
markets, there is a large amount of vega on Asian indices being bought by investment
banks from retail investors via structured products. Because of these trades, banks are
typically buying volatility and smile, and their hedging activities push volatility and smile
lower.
Institutional investors are inflating US skews: In contrast, US flows are in the
opposite direction. Structured products make up a smaller part of the US options market
and dont have as much influence on the SPX volatility surface and smile. But insurance
companies keep rolling long-dated downside puts and are driving the SPX volatility
market and skew higher.
Dislocated skew spread between Asia and the US: Currently in Asian markets, major
indices are experiencing historically low skews. In Hong Kong, given the expectation of
further easing measures by PBoC, investors are positioning for Chinese equities upside;
HSCEI and HSI 3M 90-110% skews reached multi-year lows of -2.4% and 0%
respectively (early December 2014). NKY skew is trading at a two-year low, as the shortterm uncertainty has been cleared by the snap election LDP victory last December.
KOSPI2 index 3M 90-110% skew has also been trending down with other Asian markets,
th
now at 2.6%, the 10 percentile in five years.
On the other hand, SPX skew remained stable during 2014 but rose slightly near the
year-end amid the sell-off in the commodity market and rising risk-off sentiment. SPX 3M
th
90-110% skew has spiked to a high level at 6.5%, the 95 percentile in its five-year
history.
3M 90%-110% skew time series
(vol-point)
16
14
12
10
8
6
4
2
0
(2)
(4)
2008
2009
SPX
HSCEI
NKY-SPX
(vol-point)
NKY
Kospi2
HSCEI-SPX
KOSPI2-SPX
4
2
0
(2)
(4)
(6)
(8)
(10)
(12)
2010
2011
2012
77
2013
2014
2015
(14)
2008
2009
2010
2011
2012
Asia Equity Derivatives Strategy: Guillaume Derville, Winner Lee, Shun Maruyama, Shuai Chen
Flow Sales: Hong Kong: (852) 2108 5639, Singapore: (65) 6210 1883
2013
2014
2015
NOT F or
Underlyings
NKY Index
China H-Shares
HSCEI Index
Korea
KOSPI2 Index
United States
SPX Index
Trade details
Maturity
18 Months
Currency
USD
Indicative Pricing
4.4%
78
Asia Equity Derivatives Strategy: Guillaume Derville, Winner Lee, Shun Maruyama, Shuai Chen
Flow Sales: Hong Kong: (852) 2108 5639, Singapore: (65) 6210 1883
NOT F or
Simulated performance
Payoff
Premium
50%
45%
40%
35%
30%
25%
20%
15%
10%
5%
0%
16%
12%
8%
4%
0%
21.4%
14.4%
10.4%
0-3%
01
02
03
79
45.4%
04
05
06
07
08
09
10
11
12
3-6%
8.4%
6-9%
13
Source: BNP Paribas
Asia Equity Derivatives Strategy: Guillaume Derville, Winner Lee, Shun Maruyama, Shuai Chen
Flow Sales: Hong Kong: (852) 2108 5639, Singapore: (65) 6210 1883
9-12%
12-15%
NOT F or
Buy Basket of Dec-16 80% Put on Asian Indices [NKY, HSCEI and Kospi2] and
Sell Basket of Dec-16 80% Put on Global Indices [SPX, AS51] at 0.04 vol-pt
difference
EDS Asia proposed the strategy Asian Basket Volatility vs. US/AS51 Volatility in its
4Q14 report The Tipping Point (dated 9 October 2014). Since then, this strategy has
been realising well. In the past quarter, the average realised/implied volatility ratios were
1.04 for NKY, 0.87 for HSCEI, 0.76 for Kospi2, while 0.61 for SPX and 0.68 for AS51.
Asian market underreacted in the most recent sell-off: On 5 January 2015, SPX fell
1.83% and SX5E 3.7% amid a further 5% plunge in oil prices. VIX added 2.1 vol-pts, but
VNKY, VHSI and VKOPSI only added 1.4, 0.5 and 1.5 vol-pts respectively. This
suggests it is a good time to enter this volatility carry arbitrage trade again.
A recap of our arbitrage strategy rationale: As mentioned in the section Conviction
Trade 9: Systematic Strategy on Skew Spreads, the volatility dynamics in Asia and the
US are driven by different market activities. Asia volatility is usually pushed lower by
banks due to structured product issuance, while SPX volatility is usually lifted by the US
insurance companies rolling long-dated puts.
As a result, the realised/implied volatility ratio of Asian indices are usually below that of
SPX, as shown in the chart below, suggesting a good volatility carry arbitrage
opportunity. Also, we notice that the AS51 index has a remarkably low realised/implied
volatility ratio and, therefore, can be considered as a decent substitute for SPX.
Historically, variance or volatility swaps were the simplest ways to implement relative
value trades. However, hedging variance swaps on Asian indices using very low strikes
is challenging as the liquidity of the low strikes is limited. This has resulted in higher
premium between variance swaps and vanilla option. Asian indices have been impacted
more than those in the US or the European Union due to liquidity constraints. So now
when trading spreads of volatility between Asia and the US, volatility arbitragers are
willing to avoid paying for this expensive spread of convexity and are turning to plain
vanilla. The volatility arbitrage opportunity via plain-vanilla puts offer very tight spreads
and very good liquidity.
SPX and AS51 have the lowest realised/implied volatility ratios
Comparison Ratio Realized / Implied Volatility
160%
HSCEI, NKY and Kospi2 have the highest
realized/implied ratio
SPX and AS51 have the lowest
realized/implied ratio
140%
120%
100%
80%
60%
40%
2007
2008
NKY
2009
Kospi2
2010
HSCEI
2011
DAX
2012
SX5E
2013
UKX
80
Asia Equity Derivatives Strategy: Guillaume Derville, Winner Lee, Shun Maruyama, Shuai Chen
Flow Sales: Hong Kong: (852) 2108 5639, Singapore: (65) 6210 1883
2014
SPX
AS51
NOT F or
NKY
Kospi2
SX5E
DAX
UKX
SPX
AS51
91%
86%
83%
77%
77%
74%
88%
89%
83%
73%
70%
70%
Average ratio
103%
98%
since 2007
Average ratio
95%
94%
since 2011
Source: BNP Paribas; data as of 6 October 2014
Min Realised
Vol Spread
minus Offer
Max Realised
Vol Spread
minus Offer
Last Realised
Vol Spread
minus Offer
Long Put
Short Put
Vol Spread
offer
Kospi2
SPX
-5.59%
11.2%
5.9%
17.0%
9.8%
HSCEI
SPX
1.36%
10.0%
2.5%
21.8%
6.2%
NKY
SPX
-1.36%
6.6%
1.0%
14.6%
14.0%
Kospi2
AS51
-1.78%
6.8%
2.9%
9.6%
2.9%
HSCEI
AS51
5.17%
5.5%
-1.3%
18.2%
-0.7%
NKY
AS51
2.45%
2.1%
-3.2%
8.1%
7.1%
Asia
AS51 / SPX
0.04%
7.1%
3.6%
11.5%
6.6%
35%
25%
30%
15%
20%
5%
10%
-5%
0%
-15%
2007
2008
2009
2010
2011
2012
2013
2014
-10%
2007
2008
2009
2010
2011
2012
2013
2014
60%
40%
50%
30%
30%
20%
20%
10%
10%
0%
-10%
2007
81
2008
2009
2010
2011
2012
2013
2014
0%
2007
2008
2009
2010
2011
Asia Equity Derivatives Strategy: Guillaume Derville, Winner Lee, Shun Maruyama, Shuai Chen
Flow Sales: Hong Kong: (852) 2108 5639, Singapore: (65) 6210 1883
2012
2013
2014
NOT F or
20%
20%
10%
5%
10%
0%
5%
-5%
0%
-10%
-5%
-15%
2007
2008
2009
2010
2011
2012
15%
2013
-10%
2007
2014
2008
2009
2010
2011
20%
10%
5%
0%
-5%
2007
2008
2009
2010
2011
2012
2013
2014
82
Asia Equity Derivatives Strategy: Guillaume Derville, Winner Lee, Shun Maruyama, Shuai Chen
Flow Sales: Hong Kong: (852) 2108 5639, Singapore: (65) 6210 1883
2012
2013
2014
NOT F or
Current
1-wk ago
1-mth ago
25.0
21.0
24.0
20.0
Current
1-wk ago
1-mth ago
19.0
23.0
18.0
22.0
17.0
21.0
16.0
15.0
20.0
1M
2M
3M
6M
9M
1M
2M
29.0
late June
1-mth ago
28.0
6M
9M
Current
17.0
1-wk ago
1-mth ago
16.0
27.0
15.0
26.0
14.0
25.0
13.0
24.0
12.0
23.0
22.0
11.0
1M
2M
3M
6M
9M
1M
2M
3M
6M
9M
(vol-pt)
Current
19.0
1-wk ago
1-mth ago
18.0
17.0
16.0
15.0
14.0
13.0
12.0
11.0
1M
2M
3M
6M
9M
Current
19.0
18.0
17.0
16.0
15.0
14.0
13.0
12.0
11.0
10.0
1M
2M
3M
1-wk ago
6M
9M
83
Current
3M
Asia Equity Derivatives Strategy: Guillaume Derville, Winner Lee, Shun Maruyama, Shuai Chen
Flow Sales: Hong Kong: (852) 2108 5639, Singapore: (65) 6210 1883
1-mth ago
NOT F or
Fear Index
VIX (S&P 500 volatility index)
(vol-point)
90
80
70
60
50
40
30
20
10
0
2007 2008 2009 2010 2011 2012 2013 2014
100
90
80
70
60
50
40
30
20
10
2007 2008 2009 2010 2011 2012 2013 2014 2015
100
90
80
70
60
50
40
30
20
10
0
2007 2008
110.0
100.0
90.0
80.0
70.0
60.0
50.0
40.0
30.0
20.0
10.0
2007 2008 2009 2010 2011 2012 2013 2014 2015
(vol-point)
90
100.0
90.0
80
80.0
70
70.0
60
60.0
50
50.0
40
40.0
30.0
30
20.0
20
10.0
2007 2008 2009 2010 2011 2012 2013 2014 2015
10
2008
2009
2010
2011
2012
84
Asia Equity Derivatives Strategy: Guillaume Derville, Winner Lee, Shun Maruyama, Shuai Chen
Flow Sales: Hong Kong: (852) 2108 5639, Singapore: (65) 6210 1883
2013
2014
2015
NOT F or
(vol-point)
3M HSI Convexity
3M NKY Convexity
6.0%
6.0%
5.0%
5.0%
4.0%
4.0%
3.0%
3.0%
2.0%
2.0%
1.0%
1.0%
0.0%
2008
2009
2010
2011
2012
2013
2014
2015
0.0%
2008
2009
2010
2011
2012
2013
2014
2015
(vol-point)
(vol-point)
3M HSCEI Convexity
7.0%
3M Kospi2 Convexity
6.0%
6.0%
5.0%
5.0%
4.0%
4.0%
3.0%
3.0%
2.0%
2.0%
1.0%
1.0%
0.0%
2008
2009
2010
2011
2012
2013
2014
2015
0.0%
2008
2009
2010
2012
2013
2014
2015
3M AS51 Convexity
3.5%
3M Nifty Convexity
3.5%
3.0%
3.0%
2.5%
2.5%
2.0%
2.0%
1.5%
1.5%
1.0%
1.0%
0.5%
0.5%
0.0%
2008
2011
2009
2010
2011
2012
2013
2014
2015
0.0%
2008
2009
2010
2011
2012
2013
2014
2015
Note: Convexity (variance swap minus volatility swap spread) is calculated as (implied variance swap minus implied volatility of ATM straddles)/2; Convexity
data as of 2 January 2015;
Source: BNP Paribas
85
Asia Equity Derivatives Strategy: Guillaume Derville, Winner Lee, Shun Maruyama, Shuai Chen
Flow Sales: Hong Kong: (852) 2108 5639, Singapore: (65) 6210 1883
NOT F or
Realised correlation
6M Correlation Of Regional Indices
Current
6Y Max
6Y Low
(vol-point) (vol-point) (vol-point)
Regional Indices
SPX-SX5E-NKY
25.3
54.6
19.9
(29.2)
5.5
HSI-AS51-NKY
38.4
80.7
28.2
(42.3)
3.2
HSI-HSCEI-NKY
45.1
84.5
40.3
(39.3)
1.2
HSI-KOSPI2-NKY
31.3
79.2
26.6
(47.9)
1.6
HSI-KOSPI2-AS51
38.3
82.1
28.2
(43.8)
3.3
HSI-KOSPI2-TWSE
38.2
84.0
41.5
(45.9)
1.5
60
(%)
90.0
80.0
50
70.0
40
60.0
30
50.0
40.0
20
30.0
10
2007
2008
2009
2010
2011
2012
2013
2014
2015
20.0
2007 2008 2009 2010 2011 2012 2013 2014 2015
90.0
90.0
80.0
80.0
70.0
70.0
60.0
60.0
50.0
50.0
40.0
40.0
30.0
30.0
2007 2008 2009 2010 2011 2012 2013 2014 2015
20.0
2007 2008 2009 2010 2011 2012 2013 2014 2015
(%)
(%)
90.0
90.0
80.0
80.0
70.0
70.0
60.0
60.0
50.0
50.0
40.0
30.0
40.0
20.0
2007 2008 2009 2010 2011 2012 2013 2014 2015
30.0
2007 2008 2009 2010 2011 2012 2013 2014 2015
86
Asia Equity Derivatives Strategy: Guillaume Derville, Winner Lee, Shun Maruyama, Shuai Chen
Flow Sales: Hong Kong: (852) 2108 5639, Singapore: (65) 6210 1883
NOT F or
3M
6M
1Y
(vol-point)
2Y
16
14
14
12
12
10
10
2
2007
2008
2009 2010
2011 2012
2013 2014
2015
0
2007 2008
1Y 90-110% skew
SPX
HSCEI
(vol-point)
8
3M
6M
1Y
2Y
SX5E
Kospi2
NKY
(vol-point)
SPX
SX5E
NKY
14
HSI
NIFTY
AS51
12
6
5
4
10
1
0
(1)
2008
0
2009
2010
2011
2012
2013
2014
2015
1M
2M
3M
6M
9M
Current
12.0
1-wk ago
1-mth ago
10.0
8.0
6.0
4.0
2.0
0.0
1M
2M
3M
6M
9M
Current
0.5
0.0
(0.5)
(1.0)
(1.5)
(2.0)
(2.5)
(3.0)
(3.5)
(4.0)
1M
2M
3M
1-wk ago
6M
9M
1-mth ago
Note: We defined the 90-110% skew as the implied volatility of 90% strike minus the implied volatility of 110% strike; skew data as of 2 January 2015;
Sources: Bloomberg; BNP Paribas
87
Asia Equity Derivatives Strategy: Guillaume Derville, Winner Lee, Shun Maruyama, Shuai Chen
Flow Sales: Hong Kong: (852) 2108 5639, Singapore: (65) 6210 1883
NOT F or
3M
6M
1Y
(vol-point)
14
14
12
12
10
10
0
2007 2008
3M
6M
1Y
2Y
(vol-point)
6M
1Y
2Y
3M
6M
9M
2Y
14
12
10
8
6
4
2
0
2007 2008 2009 2010 2011 2012 2013 2014 2015
1Y
14
12
10
8
6
4
2
0
(2)
(4)
2007 2008 2009 2010 2011 2012 2013 2014 2015
(vol-point)
6M
0
2007 2008 2009 2010 2011 2012 2013 2014 2015
3M
11
10
9
8
7
6
5
4
3
2
2007 2008 2009 2010 2011 2012 2013 2014 2015
(vol-point)
3M
6M
1Y
2Y
12
10
8
6
4
2
0
2007 2008 2009 2010 2011 2012 2013 2014 2015
Note: We defined the 90-110% skew as the implied volatility of 90% strike minus the implied volatility of 110% strike; skew data as of 2 January 2015;
Sources: Bloomberg; BNP Paribas
88
Asia Equity Derivatives Strategy: Guillaume Derville, Winner Lee, Shun Maruyama, Shuai Chen
Flow Sales: Hong Kong: (852) 2108 5639, Singapore: (65) 6210 1883
NOT F or
Put/Call ratio
Put/Call (open interest) ratio NKY
(Index)
1.15
1.10
1.05
16000
1.00
14000
0.95
('000 contract)
0.85
10000
0.80
Oct-12 Feb-13 Jun-13 Oct-13 Feb-14 Jun-14 Oct-14
8000
2200
2000
1600
1400
1200
Oct-12 Feb-13 Jun-13 Oct-13 Feb-14 Jun-14 Oct-14
1.70
1.60
24000
1.50
1.40
1.30
('000 contract)
350
250
22000
200
1.10
20000
1.00
19000
0.90
Oct-12 Feb-13 Jun-13 Oct-13 Feb-14 Jun-14 Oct-14
18000
300
23000
21000
1.20
150
100
50
Oct-12 Feb-13 Jun-13 Oct-13 Feb-14 Jun-14 Oct-14
2400
1800
12000
0.90
(Index)
1.80
2600
1000
11500
800
11000
700
10500
600
10000
500
9500
400
9000
300
8500
200
Oct-12 Feb-13 Jun-13 Oct-13 Feb-14 Jun-14 Oct-14
2.00
1.90
1.80
1.70
1.60
1.50
1.40
1.30
1.20
1.10
1.00
Oct-12 Feb-13 Jun-13 Oct-13 Feb-14 Jun-14 Oct-14
900
Note: Put/Call Ratio = Open interest of total Put contracts / Open interest of total Call contracts; we use 20-day moving average to smooth out the effect of
monthly expiration which lead to a sudden drop in open interest; Data as of 2 January 2015;
Sources: Bloomberg; BNP Paribas
89
Asia Equity Derivatives Strategy: Guillaume Derville, Winner Lee, Shun Maruyama, Shuai Chen
Flow Sales: Hong Kong: (852) 2108 5639, Singapore: (65) 6210 1883
NOT F or
('000 contract)
650
550
500
450
400
350
300
250
200
Oct-12 Feb-13 Jun-13 Oct-13 Feb-14 Jun-14 Oct-14
3.00
2.80
2.60
2.40
2.20
2.00
1.80
1.60
1.40
1.20
Oct-12 Feb-13 Jun-13 Oct-13 Feb-14 Jun-14 Oct-14
5400
5200
5000
4800
4600
4400
4200
('000 contract)
OI of Put contract (20-day moving average)
600
OI of Call contract (20-day moving average)
550
500
450
400
350
300
250
200
150
100
Oct-12 Feb-13 Jun-13 Oct-13 Feb-14 Jun-14 Oct-14
600
2600
8000
2200
7500
2000
7000
1800
6500
1600
6000
1400
5500
1200
5000
1000
Oct-12 Feb-13 Jun-13 Oct-13 Feb-14 Jun-14 Oct-14
1.40
1.20
1.00
0.80
0.60
Oct-12 Feb-13 Jun-13 Oct-13 Feb-14 Jun-14 Oct-14
2400
Note: Put/Call Ratio = Open interest of total Put contracts / Open interest of total Call contracts; we use 20-day moving average to smooth out the effect of
monthly expiration which lead to a sudden drop in open interest; Data as of 2 January 2015;
Sources: Bloomberg; BNP Paribas
90
Asia Equity Derivatives Strategy: Guillaume Derville, Winner Lee, Shun Maruyama, Shuai Chen
Flow Sales: Hong Kong: (852) 2108 5639, Singapore: (65) 6210 1883
NOT F or
2.0
4.5
4.0
1.5
3.5
3.0
1.0
2.5
2.0
0.5
1.5
1.0
2008
2009
2010
2011
2012
2013
2014
2015
0.0
2008
2009
2010
2011
2012
2013
2014
2015
5.0
6.0
4.0
5.0
4.0
3.0
3.0
2.0
2.0
1.0
0.0
2008
1.0
2009
2010
2011
2012
2013
2014
2015
0.0
2008
2009
2010
2011
2012
2013
2014
2015
(%)
8.0
8.0
7.0
7.0
6.0
6.0
5.0
5.0
4.0
4.0
3.0
3.0
2.0
2008
2.0
2009
2010
2011
2012
2013
2014
1.0
2008
2009
2010
2011
2012
91
Asia Equity Derivatives Strategy: Guillaume Derville, Winner Lee, Shun Maruyama, Shuai Chen
Flow Sales: Hong Kong: (852) 2108 5639, Singapore: (65) 6210 1883
2013
2014
2015
NOT F or
China
(Index, Jan-08=100)
110
100
90
80
70
60
50
40
30
2008
(Index, Jan-08=100)
MSCI Japan
MSCI China
110
2009
2010
2011
2012
2013
2014
2015
60
50
40
30
2008
2009
2010
2011
Hong Kong
2010
2011
2012
2013
2014
2015
120
110
100
90
80
70
60
50
40
30
2008
MSCI Korea
2009
2010
Taiwan
2010
2011
2012
2013
2014
2015
110
100
90
80
70
60
50
40
30
2008
2012
2014
2015
2009
2010
2011
2012
2013
2014
2015
Singapore
2010
2011
2012
2013
2014
2015
120
110
100
90
80
70
60
50
40
30
2008
MSCI Singapore
2009
2010
2011
2012
92
2013
(Index, Jan-08=100)
MSCI India
2009
2011
MSCI Australia
India
(Index, Jan-08=100)
110
100
90
80
70
60
50
40
30
2008
2015
(Index, Jan-08=100)
MSCI Taiwan
2009
2014
Australia
(Index, Jan-08=100)
120
110
100
90
80
70
60
50
40
30
2008
2013
(Index, Jan-08=100)
2009
2012
Korea
(Index, Jan-08=100)
120
110
100
90
80
70
60
50
40
30
2008
100
90
80
70
Asia Equity Derivatives Strategy: Guillaume Derville, Winner Lee, Shun Maruyama, Shuai Chen
Flow Sales: Hong Kong: (852) 2108 5639, Singapore: (65) 6210 1883
2013
2014
2015
NOT F or
Thailand
(Index, Jan-08=100)
(Index, Jan-08=100)
MSCI Malaysia
150
130
110
90
70
50
30
2008
2009
2010
2011
2012
2013
2014
2015
210
190
170
150
130
110
90
70
50
30
2008
MSCI Thailand
2009
2010
Indonesia
130
110
90
70
50
2009
2010
2011
2012
2013
2014
2015
190
170
150
130
110
90
70
50
30
2008
MSCI Philippines
2014
2009
2010
2011
2012
93
2013
(Index, Jan-08=100)
MSCI Indonesia
150
30
2008
2012
Philippines
(Index, Jan-08=100)
170
2011
Asia Equity Derivatives Strategy: Guillaume Derville, Winner Lee, Shun Maruyama, Shuai Chen
Flow Sales: Hong Kong: (852) 2108 5639, Singapore: (65) 6210 1883
2013
2014
NOT F or
gerry.fowler@uk.bnpparibas.com
Martial Godet
martial.godet@uk.bnpparibas.com
Antoine Deix
+33 1 40 14 06 22
antoine.deix@bnpparibas.com
ankitkumar.gheedia@uk.bnpparibas.com
Kevin Selmane
+44 20 75951280
kevin.selmane@uk.bnpparibas.com
Clodagh Muldoon
clodagh.muldoon@uk.bnpparibas.com
Antoine Porcheret
anthoine.porcheret@uk.bnpparibas.com
Orrin Sharp-Pierson
orrin.sharppierson@americas.bnpparibas.com
Anand Omprakash
anand.omprakash@americas.bnpparibas.com
guillaume.derville@asia.bnpparibas.com
Winner Lee
winner.lee@asia.bnpparibas.com
Shun Maruyama
shun.maruyama@japan.bnpparibas.com
Shuai Chen
shuai.chen@asia.bnpparibas.com
US
Asia
valery.bloud@asia.bnpparibas.com
Christopher Littell
christopher.littell@asia.bnpparibas.com
Will Chen
will.chen@asia.bnpparibas.com
Andrea Baumeister
andrea.baumeister@asia.bnpparibas.com
bumsoo.kim@asia.bnpparibas.com
Jon Harris
jon.harris@asia.bnpparibas.com
Stephanie Wong
stephanie.wong@asia.bnpparibas.com
Robert Newcombe
robert.newcombe@asia.bnpparibas.com
Nadia Poilane
nadia.poilane@asia.bnpparibas.com
Singapore
94
Asia Equity Derivatives Strategy: Guillaume Derville, Winner Lee, Shun Maruyama, Shuai Chen
Flow Sales: Hong Kong: (852) 2108 5639, Singapore: (65) 6210 1883
NOT F or
NOTES
95
Asia Equity Derivatives Strategy: Guillaume Derville, Winner Lee, Shun Maruyama, Shuai Chen
Flow Sales: Hong Kong: (852) 2108 5639, Singapore: (65) 6210 1883
NOT F or
NOTES
96
Asia Equity Derivatives Strategy: Guillaume Derville, Winner Lee, Shun Maruyama, Shuai Chen
Flow Sales: Hong Kong: (852) 2108 5639, Singapore: (65) 6210 1883
NOT F or
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97
Asia Equity Derivatives Strategy: Guillaume Derville, Winner Lee, Shun Maruyama, Shuai Chen
Flow Sales: Hong Kong: (852) 2108 5639, Singapore: (65) 6210 1883
NOT F or
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Asia Equity Derivatives Strategy: Guillaume Derville, Winner Lee, Shun Maruyama, Shuai Chen
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NOT F or
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