HKEx launches dividend futures

Hong Kong’s stock exchange follows in Tokyo’s footsteps by launching dividend futures.

Investors in Hong Kong had their first opportunity yesterday to buy dividend futures, the latest new product launched on the Hong Kong stock exchange.

The two new indices are the HSI Dividend Point Index and the HSCEI Dividend Point Index, which are produced by Hang Seng Indexes and measure the total cash dividend value for all constituent stocks of the underlying index, expressed in terms of index points. The HSI tracks the top blue-chips in the Hong Kong market, while the HSCEI is an index that tracks Chinese state-owned enterprises, or H-shares, listed in Hong Kong.

“Our market participants are interested in using dividend futures to hedge the dividend risk of Hong Kong-listed stocks as an alternative to over-the-counter dividend swaps,” said Calvin Tai, head of trading at Hong Kong Exchanges and Clearing, which operates the Hong Kong bourse. “These new contracts will address market needs and complement our existing range of HSI and HSCEI products.”

BNP Paribas, Goldman Sachs and Societe Generale will act as market makers to help trading in the new contracts.

There are good reasons to invest in dividends, but the motivation for creating this market does not actually originate with investors -- instead, it has been driven by banks and financial institutions that want a better way to offload the dividend exposures they accumulate from issuing structured products.

This is reflected in the markets that have pioneered these contracts. Japan’s Nikkei is second only to Euro Stoxx in the volume of structured products it trades, and these two markets were the first to get going. In Europe, investors started trading dividend futures in mid-2008 and the market now has an open interest of €7 billion ($9.8 billion), while the Japanese started just this summer.

The market might have started because of an excess of supply, rather than demand, but investors are starting to warm to the idea of investing in dividends.

“The great thing about dividends is that you can see it as an asset by itself and it appeals to a mix of all investors,” said Sebastien Mailleux, head of forward trading for Asia ex-Japan at BNP Paribas. “If you have a diversified portfolio between asset classes, you can access dividends; if you trade only equities, you can see dividends as an alternative investment or as a hedge -- if your portfolio is long dividends, you can use these contracts to cover your future flow of dividends.”

Dividends, which companies distribute from their earnings, tend to be less jittery than stocks. One of the best and worst things that stockmarkets do is to aggregate investors’ views. This is, of course, excellent in many ways, but, like a panicked herd, investors tend to respond to what other members of the herd are doing, rather than responding to the underlying nature of the actual threats or opportunities; real or imagined.

Worse, investors also behave in ways that do not always represent their true sentiments towards a stock. Not everyone who sells a stock is doing so because they don’t like it -- and vice versa. Dividends tend to be more closely correlated to earnings, which is good news for China bulls.

“The main point about these two new futures is they allow access to the China market,” said Mailleux. “By taking dividend exposure, investors can access directly the results of the underlying companies, with less noise from the stockmarket.”

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