• Daily Leverage Certificates (DLCs) offer flexibility to trade both rising and falling markets, with long or short 5x or 7x leveraged exposure, on the daily performance of selected Singapore and Hong Kong stocks and Indices. With S&P 500 DLCs scheduled to list tomorrow, the current total offering will expand to 246 DLCs.
   
• Recently, UBS issued 10 DLCs focused on the Hong Kong stock market, which included Long and Short 5x DLCs on the largest three technology stocks of the Hang Seng Index, Tencent (700), Alibaba Group (9988) and Meituan (3690), with the heavyweight trio representing as much as 20% of the Index.
   
• Meituan has showed the most volatility of the trio in 2022. On 18 Feb, the price ratio spread of Meituan to the Hang Seng Index reached a 20 month low, with a three-session Short Meituan/Long Hang Seng Index 5x leveraged trade returning 6% (excl. transaction fees) to accredited investors.

Daily Leverage Certificates (DLCs) are financial instruments issued by a third-party financial institution that have been traded on SGX since 2017. Designed for accredited investors, DLCs seek to achieve short-term investment results that correspond to the daily magnified performance of the underlying index or stock. For a more comprehensive overview click here.

Of the 242 DLCs currently listed for trading in Singapore, Société Générale are the issuer of 232 DLCs, with UBS issuing 10 DLCs on 15 Feb. These 10 Long and Short DLCs offer long/short fixed leverage of 5x the daily performance of Tencent (700), Alibaba Group (9988) and Meituan (3690) and BYD (1211), in addition to 7x the daily performance of the Hang Seng Index (HSI).

Together, the largest technology stocks of the HSI, Tencent, Alibaba Group and Meituan (3690) comprise more than 20% of its weight. Combined, the trio maintain a market value of HKD 7.4 trillion (~S$1.3 trillion). Tencent is Hong Kong’s largest stock by market value with a cap of HKD 4.1 trillion (~S$720 billion) and for comparative size, its 9MFY21 (ended 30 Sep) reported revenue of RMB 416 billion (~S$88 billion), with attributable profit of RMB 130 billion (~S$28 billion). 

The three HSI heavyweights declined 19%, 49% and 23% respectively in 2021, weighing the HSI which ended 2021 down 14%. The first two months of 2022 has seen the three heavyweights decline 5%, 12% and 24% respectively, with the HSI declining 3%.

The three stocks have a history of being big movers, with Tencent gaining 110% over the past five years, Alibaba declining 41% since listing in Hong Kong in Nov 2019, and Meituan gaining 150% since listing in Sep 2018. Going into March, the trio maintained annualised 30-day historical volatility of 35%, 60% and 70%. As the IMF noted in last January, a wave of regulatory policy measures targeting the China technology sector in 2021, while intended to strengthen competition, consumer privacy, and data governance, increased policy uncertainty. This extended to increased volatility in the relevant technology stocks in 2021.  

With Meituan demonstrating the highest 30-day volatility of the three stocks, the recent moves of the e-commerce platform can be applied to demonstrate and educative application of Daily Leverage Certificates (“DLCs”).  

Example of Meituan/HSI DLC Pairs Trade

Back on 18 Feb, the price ratio spread of Meituan (HKD 188.0) to the HSI (24,327) reached a low (0.0077) not seen since late July 2020. Investors who anticipated that the price ratio spread of Meituan to the HSI would decline further could buy the UB 5x Short Meituan [HMMW] and Buy the SG 5x Long HSI [CWAW].

The UB 5x Short Meituan [HMMW] ended the 18 Feb session at S$0.986 per unit and the SG 5x Long HSI [CWAW] ended the 18 Feb session at S$0.397 per unit. Note the DLC standard board lot size is 100 units. Investing close to S$10,000 on each leg positioned the trade to provide a return if the share price of Meituan continued to underperform the HSI.  

Three sessions later, the price ratio spread of Meituan (HKD 176.60) to the HSI (23,660) had turned higher, to 0.0075 on 23 Feb, from 0.0073 on 22 Feb. The price ratio also closed above two standard deviations of the price ratio spread’s 1-month mean (0.0074).

Had the accredited investor closed the position on the 23 Feb, it would have led to a 26% return on the UB 5x Short Meituan [HMMW] and a 14% decline on the SG 5x Long HSI [CWAW]. Basically, both markets declined, however Meituan had continued to trader with higher beta and decline more than the Hang Seng Index over the three sessions.

Like the stock market, the DLC full-day trading Pre-Close period is 5:00pm to 05:04pm/05:05pm, with the Pre-Open/Close phase ending randomly at any time within the 05:04pm/5:05pm one minute window, with the Non-Cancel phase begins immediately after. For pricing information click here.

The above short-term trade generated a return of 6.1%, with the initial investment of S$19,963 excluding transaction fees growing to S$23,350 on 22 Feb, then to S$21,178 on 23 Feb.  At the same time, the accredited investor mitigated part of the market risk of the pairs trade to the price ratio between Meituan and the HSI, with the anticipation that Meituan would continue to underperform the HSI.

While the UB 5x Short Meituan [HMMW] leg returned S$2,626, the SG 5x Long HSI [CWAW] leg generated a decline of S$1,411, generating an indicative net return of S$1,215 excluding transaction fees. During the three trading sessions spanning the close of 18 Feb to the 23 Feb close, the share price of Meituan declined, while the HSI also declined.

Note had the accredit investor taken the converse position with a long Meituan position and short HSI with the same leverage factor that would have made a loss within the vicinity of -6%.  Also note that the performance of the DLC may vary from the leverage factor of the DLC. This is because the performance of the underlying asset and the DLC is reset at the end of each trading day.

Note the above prices are based on the relevant DLC daily close prices.

Please note that DLCs are Specified Investment Products (SIPs).