Investor appetite shifts from commodities to equities, pushing volume up 16% to $353 million

By Emma Trincal

New York, June 15 - In a market characterized by a sell-off in both equities and commodities, investors opted for equities last week. Buyers exited commodities and re-entered the equity-linked market aggressively, lifting issuance by 16% to $353 million for the week ended Friday, according to preliminary data compiled by Prospect News.

From commodities to equities

"Commodities were down last week, so people lost appetite for it. In a reversal, they switched back to equities," a market participant said.

Equity issuance nearly doubled last week to $273 million from $140 million the week before, excluding exchange-traded notes. They took on a 77.5% market share, compared with 46% during the previous week.

At the same time, commodities sales dropped 80% to $24 million from $123 million the week before, making for only 6.7% of the total volume, in sharp contrast with the 40.5% market share observed the previous week, according to data compiled by Prospect News.

Total issuance volume for non-ETN deals rose by 16% to $353 million from $304 million.

Volume growth was even more notable on a month-to-month basis. From June 1 to June 11, agents sold $581 million, up 66.5% from the same time in May, which saw the sale of $349 million.

A sellsider said that the inflow of money from commodities into equities was to be expected in this market environment.

"Investors who buy commodities tend to be directional and trade on momentum. When the market declines, they realize there is risk on the way down and they pull back," he said.

"Emotionally, the direction of commodities has a very strong impact on investors' behavior.

"On the other hand, a decline in equities is often perceived as an opportunity. When equity prices go down, value investors are stepping in.

"And with volatility up, structured products linked to equity suddenly become more attractive. You get better terms."

Stock picking

Equity growth mostly came from a renewed bid for single-stock deals, data compiled by Prospect News showed.

Stock deals grew 135% last week to $101 million, making up 28.5% of the issuance against 14% the previous week.

Equity index-linked notes issuance rose vigorously too but at a less dramatic pace, up 75% at $169 million. It represented 48% of the total.

"When the market is bullish, people buy equity products to ride the bull," the sellsider said.

"When you have a pullback, people see an opportunity to get in stocks. That's the value investing factor.

"Of course, things will change if the pullback proves to be a prolonged pullback. But for now, lower prices are seen as a bargain."

Deal terms also drive the run for stocks, the market participant said.

"People are trying to capture more returns with tactical plays," he said.

"Coupon levels are more interesting. They're willing to take more risk with stocks in order to enjoy higher coupons.

"And people have views on specific names. They want to play the stock at the right entry point."

The top deal last week was a single-stock-linked note brought to market by Bank of America Corp.: $50.29 million of 9.5% STEP Income Securities due June 25, 2012 linked to the common stock of Goodyear Tire & Rubber Co.

Back to buffers

A renewed interest in equities in general and stocks in particular did not mean that investors all of a sudden had turned bullish. On the contrary, sources said.

"People are willing to come back to equities, but with some protection," the market participant said. "With several consecutive days of negative returns, buffers are becoming more popular with equity deals. While the entry points are attractive, people do want the downside protection."

The appetite for buffers was a strong trend last week, one that marked a reversal from the recent development of leveraged plays with no downside protection.

Leveraged buffered deals were the most popular structure last week, growing 56% to $72 million and amounting for 20% of the total versus 15% the week before.

The trend held true on a month-over-month basis as well with nearly four times more volume in this structure ($114 million) than during the same time in May ($31 million).

Those types of deals, accounting for only 9% of the total last month, rose to be 19% in June.

For the sellsider, the renewed interest in buffers suggests that the market may be at a turning point.

"The number of buffered deals is an indicator of investors' sentiment," he said. "Maybe the market is turning slightly more bearish.

"During bullish rides, people are more willing to forgo the buffer in order to get a higher cap or more leverage. But when investors are more cautious, they want the buffer."

The third- and fourth-largest deals last week were both leveraged buffered notes tied to a basket of equity indexes. The buffer applied to the basket components, not to the basket itself. Both deals had the same terms and were sold by J.P. Morgan Securities LLC. The difference was in the size and the issuer.

One came from JPMorgan Chase & Co., which issued $23.18 million. Barclays Bank plc priced the other for $18.12 million.

The 0% notes due June 27, 2012 are linked to three buffered return enhanced components, each converted into dollars. The components are the Euro Stoxx 50 index with a 53% weight, the FTSE 100 index with a 24% weight and the Topix index with a 23% weight.

The caps, specific to each component, are the same for both transactions as well as the 10% buffer.

The second top deal of the week was an equity-linked note from HSBC USA Inc.: $46.26 million of 0% knock-out buffer notes due June 27, 2012 linked to the S&P 500 index. JPMorgan was the agent.

JPMorgan tops

The top agent for the week was JPMorgan with $130 million sold in 12 deals, or 37% of the total. JPMorgan kept the same ranking as the week before.

Goldman Sachs remained No. 2. It priced 10 deals totaling $76 million, or 22% of the total.

Merrill Lynch took the third slot with two big deals totaling $56 million, or 16% of the market.

The ranking is the same for the month to date except that UBS is ranked No. 3.

For the year to date, Merrill Lynch is first, followed by JPMorgan and UBS.

"Emotionally, the direction of commodities has a very strong impact on investors' behavior." - A sellsider

"While the entry points [in equity] are attractive, people do want the downside protection." - A market participant

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