Although derivative use itself is well established in Europe the nature of its use has been changing in the new euro environment. Increasingly the focus has been on the benchmark shift, particularly in continental Europe, as portfolios change from a pure domestic exposure to one that encompasses continental Europe and Euroland. There has also been a change in emphasis from the perspective of benchmark providers such as MSCI, FT/S&P and STOXX. Lastly there has been the emergence of an interest in sector-specific products.
The trends across the various European markets are not uniform and this is even the case within euroland. In Germany, where there is significant interest in and usage of derivatives, there has been a trend towards reduced involvement in Dax-based products, even at the retail level, with the main volume being in Euro STOXX 50 products. Passive funds have been particularly keen to track the broader euro indices more closely and have tended to do this by using Euro STOXX rather than MSCI products. The active management business is still more conservatively positioned using the MSCI benchmark and thus still has a reasonable demand for these products, although again this has been diminishing.
The Netherlands, which has a better developed equity culture, has a greater emphasis on pan-European derivative products. This is clear from the greater use of FT/S&P products. In addition the popularity of the Euro STOXX 50 at a retail level is evident. The AEX products are generally becoming less important.
It is notable that Italy, Spain, Belgium and France have tended to be more domestically oriented, even though the euro has been a clear feature of portfolio shifts over the past six months. In the case of Spain and Italy we believe that the local focus is a function of lower overall equities ownership. As this rises institutions are likely to increase their diversification and use of European products.
Non-euro countries are also interesting, in that the UK has a very dominant domestic focus but there is a clear trend to pan-European FT/S&P and Eurotop-based products. On the institutional side this reflects a gradual positioning prior to euro entry in three to four years’ time. In Sweden and Switzerland we still see a predominantly domestic focus.
Overall the key growth in European derivative use has been in euro-based products at the expense of local index-based derivatives, whilst the benchmark trend has seen STOXX win considerable market share from both FT/S&P and more importantly MSCI. STOXX has been the most popular product from a retail angle.
Nazim Hamid is director of portfolio and index research at Deutsche Bank in London