Asian investors grow their European exposure as opportunities and diversification grow

Over the past decade, Europe has lagged other regions in its appeal to Asia-based investors. However, as investors across Asia seek diversification and tap into the growth of European markets, attention and capital flows are increasing.

According to Julien Romand, Head of Derivatives Clearing for Financial Institutions APAC at BNP Paribas, the overall activities of derivatives trading from Asian investors have “surged” in recent years, linked to the development of both regulatory frameworks and exchange infrastructures.

Most Asian investors invest in global markets and naturally utilize European derivatives to hedge any exposure.

“The listed derivatives markets provide a much more efficient way for Asian investors and, by extension, Asian-based trading desks to access any European markets via existing derivatives setups with international banks or brokers providing single entry points from both an execution and clearing point of view.”

“This has become a key requirement for sophisticated Asian investors to manage risk in an environment of increased geopolitical, interest rate and currency volatility.”

Broadbased indexes

At the same time as investors in Asia are looking to Europe, the appeal of broad-based indexes is on the rise. Broad-based indexes allow investors to gain exposure to a wider market with more reliable and less volatile returns than narrower indexes.

Eurex’s futures and options suite on the STOXX^® Europe 600 index, which tracks the 600 largest listed companies in Europe and replicates almost 90 percent of the underlying investable market, has been well positioned to capture inflows from these trends.

The reasons behind the increased interest in STOXX^® Europe 600 futures and options are multiple. Firstly, performance in the index in recent years has been strong. The index returned 15.8 percent in 2023, having hit 25 percent or more during the year, and at the time of writing, was up 9 percent in 2024 to date.

While these returns are lower than some of the U.S. tech indexes, most of the underlying companies are longstanding giants of the European economy, with long pedigrees of producing returns to investors in a market that Asian investors have typically been underweight on.

“In conversations I’ve been having with market participants, more mid-to-longer-term position holders are favoring the broader industry reach that the 600 covers,” says Kris Hopkins, Head of Buyside, Equity and Index Sales Asia and Middle East at Eurex.

“With the inclusion of stocks from across 17 European countries and sector coverage, which includes defensives such as Health Care, Utilities, Consumer Staples, Energy, as well as Financials, Technology, Industrials and others, derivatives on STOXX^® Europe 600 have provided Asian investors with an additional tool to help them diversify their portfolios further.”

Investment in the STOXX^® Europe 600 was boosted by the promotion of the concept of the “GRANOLAS”, eleven companies that provide Europe’s answer to the Magnificent 7 in the U.S. and represent 21 percent of the STOXX^® 600 index. These stocks have driven the growth in the index seen in the early part of 2024. The GRANOLAS appeal to global investors as they cover some defensive sectors such as Health Care, Financials and Energy alongside Technology, therefore representing a less tech-heavy exposure than the U.S.’s Magnificent 7.

Extended trading hours

Eurex has extended trading hours in several products, including the European benchmark products such as STOXX^® Europe 600, DAX^®, EURO STOXX 50^®, EURO STOXX^® Banks, VSTOXX^®, Micro futures, and global products like MSCI futures and FTSE Bitcoin futures, to provide greater trading and hedging opportunities for investors in Asia.

The trading hours allow investors in Asia to trade around specific events that impact European and global stock markets. Hopkins says:

With the availability to trade futures on this index during Asia business hours, Eurex provides its customers with around-the-clock trading opportunities and first-mover Asian hour advantage.

Investors in Asia, therefore, don’t have to wait until the cash markets open to take positions in European markets, providing them with round-the-clock trading opportunities.

BNP’s Romand says: “As mentioned, many Asian investors will trade on European derivatives via Asian-based desks as a convenient single point of entry to access execution services in all regions.”

“Having the possibility for Asian investors to trade on Eurex during the day session during Asian hours will undoubtedly be beneficial in terms of price or liquidity discovery and execution efficiency and will be beneficial for the overall market, enabling interests to meet from all regions during an extended session.”

“This is, of course, especially relevant given the growth in Asian investors’ activity in the European bond and equity markets in recent years.”

Eurex continues adding more products to the extended trading session, recently adding the STOXX^® Semiconductor 30 Index Futures in response to client demand.

The STOXX^® Semiconductor 30 Index Futures comprise 30 semiconductor companies from across the globe, including three from Asia, most notably Taiwan Semiconductor, which represents around 8 percent of the weighting and two other local semi-conductor companies.

This provides Asian firms with a way to trade Taiwan exposures without directly trading on a market that is hard to access for firms without existing connectivity. In addition, firms can hedge Taiwan exposures on Eurex when the cash market is closed and the U.S. futures market hasn’t yet opened.

The number of Asia-based firms engaging Europe continues to grow as firms capitalize on the opportunities to trade exposures in their time zone.

“With over 200 direct members accessing Asian hours liquidity this year, there is a clear demand for Eurex products,” says Hopkins.