The local authorities are moving to liberalise restrictions on foreign investment in structured notes, permitting investors to buy Thai equity-linked notes that are linked to individual foreign companies, as well as foreign currencies. The changes should also help Thailand compete with the region’s primary private banking hubs Singapore and Hong Kong, as well as capitalising on growth opportunities in the Greater Mekong subregion which includes the high-growth markets of Cambodia, Laos, Myanmar and Vietnam, as well as China’s Yunnan Province. Although structured notes comprise a relatively small proportion of the bond market, the move is also expected to bolster capital markets investment by tapping into a growing network of wealthy Thais.
In October 2016 Bloomberg reported that large Thai brokerages were preparing to sell structured notes for the first time in 2017. A structured note is a debt security issued by financial institutions containing an embedded derivative component that alters the security’s risk/return profile by tracking both the underlying debt and the derivative embedded in it. Structured products are generally sold to wealthy investors hoping to enhance returns.
This follows a decision by Thailand’s Securities and Exchange Commission (SEC) to allow equity-linked products tied to individual foreign companies, as well as notes issued in foreign currencies. The changes took effect in June 2016. Investors are now permitted to buy Thai equity-linked notes in US dollars, a move expected to protect them from currency market volatility. The new regulations also abolish previous minimum investment amounts for structured products, which had been set at BT10m ($282,000) for institutions. In early 2017 the SEC further amended investment regulations for Thai retail private funds, mutual funds and provident funds. It also relaxed investment limits for collateral-backed structured notes issued by special purpose vehicles, applying the “look-through” concept, in which the limit will be calculated at the collateral issuer level.
In 2015 BT26.2bn ($738.1m) worth of Thai structured notes were sold, against BT9.04trn ($254.7bn) in domestic bonds over the same period, according to SEC data. Private wealth in the Asia-Pacific region surpassed North America for the first time in 2016, rising by 10% to $17.4trn, according to French IT consultancy firm Capgemini. Although structured note volumes are limited compared to conventional bonds, banks are expected to offer more of these products in the future, as the notes better match issuers’ asset and liability management needs. Relaxed foreign investment restrictions are also expected to help transform Thailand into a regional financial hub for the Greater Mekong Subregion. Investors will benefit from rising levels of competition, product offerings and activity, supporting investment diversification.
In May 2016 Credit Suisse reported that Thailand’s high-net-worth pool is comparable to those of South Korea and Singapore, with an estimated 91,000 high-net-worth individuals, which includes those with more than $1m in investable assets. This group owns $456bn worth of investable wealth, according to the bank, which also reported an additional 340 ultrahigh-net-worth individuals, defined as people owning more than $50m in net wealth. According to a February 2017 report by wealth management publication Hubbis, the country’s private wealth growth rate averaged 12.7% in 2014, compared to the Asian average of 9.7%.
Foreign banks are taking note of this growth potential. Most recently, Credit Suisse established a dedicated onshore wealth management team in Bangkok in May 2016. Hubbis also reported that domestic banks are seeing a rise in onshore wealth management activities, although investors continue to face challenges with burdensome income reporting requirements and unclear tax policies. These problems are expected to be resolved over the medium term, according to Hubbis, suggesting that in five years the differences between offshore and onshore structuring will be negligible.
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