Investors likely to recover ELS losses as HSCEI surges

[Photo by Yonhap]

The recent surge in Hong Kong‘s Hang Seng China Enterprises Index (HSCEI), which has surpassed the 6000 mark since April 2024 after plummeting below the 5000 mark earlier in the year, suggests that losses related to equity-linked securities (ELS) tied to the index could be significantly reduced.

According to a simulation by Maeil Business Newspaper on Sunday, the expected loss from HSCEI-linked ELS products at six South Korean major banks—KB Kookmin Bank, Shinhan Bank, Hana Bank, Woori Bank, NH Nonghyup Bank, and Standard Chartered Bank Korea—is estimated at 650.8 billion won ($480 million) from mid-May 2024 to the end of the year if the underlying index maintains the 7000 level. If the index rises to 7500, the loss is expected to decrease to 234.4 billion won, about one-third; if it hits 8000, the loss is projected to drop to 88.4 billion won. The index has been rising since mid-April 2024 and hit 6934 on Friday, surpassing the 6900 mark for the first time in nine months.

Losses and gains on ELS products are determined by the performance of the underlying indices. The principal of these products is repaid if the underlying index at maturity is at least 65-70 percent of its level at the time of subscription.

If the index continues its uptrend, the HSCEI-tied products could post profits as early as June 2024 or, at the latest, August of that year. If the index maintains the 7000 level, investors in products maturing in August will likely avoid losses; if it hits 7500, this shifts to July; and if it reaches 8000, investors will likely avoid losses from June onwards.

HSCEI-linked ELS products have previously caused concern in Korea, where investors suffered large losses after a downward trend in the underlying index.