Wealth In Asia 2011

Asia's Market Turmoil an Opportunity for Savvy Investors

A trader monitors exchange rates in a dealing room at the Korea Exchange Bank in Seoul on October 4, 2011.
Jung Yeon-Je | AFP | Getty Images

Asian financial markets have shown in recent months that they remain extremely vulnerable to economic shocks from Europe and the U.S. However, some investors have been riding this volatility. They have been using the selloff to shop for cheap stocks and bonds while at the same time investing in esoteric products to profit from the turmoil.

"In the first downdraft in the market we actually saw clients opportunistically coming in and buying significantly more than they were selling," Adam Tejpaul, Head of Investments for J.P. Morgan Private Bank in Asia based in Hong Kong said. "In the second leg down in markets, the inclination was to take more of a wait-and-see approach."

Since late July, most Asian markets have fallen between 15 and 20 percent and volatility has shot up. Launched earlier this year, the Hang Seng volatility index that tracks investors’ volatility expectations, had been bouncing between 15 and 20 points for much of the year. But in early September it shot up to 51, and has remained elevated ever since.

The jump in volatility has been a double-edged sword for many investors. For the well-heeled, though, it has created plenty of opportunities. “There are investors who tend to reduce their activity in such periods. However, for savvy investors it (the volatility) increases the chances of reaching desired entry or exit points,” Gary Tiernan, Global Head of Investment Advisory, Standard Chartered Private Bank, said.

Some of the best pricing on structured products has been seen over the past few weeks—more than in the last two years, said J.P. Morgan’s Tejpaul. Among the products the bank has been recommending for some clients are equity linked notes or ELNs, which pay the investor a higher interest income than in a savings account and the opportunity to buy a stock or an index if it falls below a certain level.

"If you focus on the high quality name, you actually receive the stock at a price you're comfortable owning it," Tejpaul said.

However, Anurag Mahesh, Head of Global Investments at Deutsche Bank Private Wealth Management in Singapore, says he would rather buy stocks than structured products such as equity-linked notes.

"I think there is no free lunch in the market in that sense and I think it's better to remain liquid and fleet-footed," he said. "In these markets portfolio returns are going to be driven more from risk management, rather than aggressive asset allocation.”

Private banks also offer their clients options strategies that allow them to mimic the long/short strategies of hedge funds. Mahesh, for example, recommends using equity options to bet on a 10 to 15 percent increase in stocks, without suffering any major declines. The strategy called a call spread, involves both buying and selling a call option, which is a contract that gives an investor the right to buy or sell a stock at a certain price.

Mahesh says you can buy such call spreads betting on a 10 percent gain in the S&P 500 over a 3-month period, and the maximum you would lose even if the S&P 500 were to plunge is about 3 percent.

Whether investors are willing to put more money to work given that markets could fall further essentially depends on how much risk they can tolerate. "You sit down with (a client) and you tell him are you willing to lose 5 to 10 percent and the guy says no way, then you tell him this is not your cup of tea," Mahesh said.