Equity market's recovery remains a major factor, writes Andrew Gillingham

AFTER a sharp dip in trading volumes last year the South African warrants market is seeing a dramatic upsurge in interest from retail investors.

Michael Gallagher, head of listed products at Nedbank, says the volumes of warrants traded in SA have turned around.

"Most of last year was very quiet. However, towards the end of 2003 and the beginning of this year there has been a significant increase in volumes.

"In January there was about R200m in warrants traded, compared with the lows of less than R100m a month," Gallagher says.

He says the market is looking good for the future and if equity markets continue to improve it should have a positive effect on warrants.

At present Nedbank is not active as an issuer of warrants as it is focusing on the wholesale market. However, Gallagher says the company has done its homework and can enter the market with a minimal delay once it decides to take that step.

Gizelde Brady, head of marketing at Absa Corporate & Merchant Bank's equity derivative division, says the volumes of warrants traded have almost tripled from the levels at October last year.

This is in line with the improvement in equity markets that has been seen in recent months.

"The warrant market is looking up and we are seeing a number of old hands coming back to the market. In addition, we believe there are new investors coming into the market. Absa's main drive is to attract new investors to warrants," Brady says.

She says there is still a lack of knowledge among investors about the nature of warrants and how they may be used.

In addition to reaching investors who have not been exposed to warrants in the past, there is a need to engage in continuing education, as even knowledgeable investors forget.

"All too often investors who think they understand warrants still have half-truths and gaps in their knowledge," Brady says.

Jacques Schaefer, equity and warrants trader at Tradek, says warrants are mainly aimed at retail investors as the product is not suited to institutional investors due to the product having an expiry date.

"Warrants are a way for private investors to obtain exposure to the blue chip shares that often have share prices that place them beyond the pockets of the average investor," Schaefer says.

While warrants take advantage of volatility and can be used to profit from a fall in share prices through a put warrant, most investors prefer to buy call warrants and profit from an increase in a share price. Therefore the value of warrants traded tends to decrease in a bear market.

At the same time, now that there has been an improvement in the equity market, volumes of warrants traded are increasing.

"Volumes are not as high as they used to be, but they are not far off previous highs," says Schaefer.

Brett Duncan, head of the warrant desk at Standard Corporate & Merchant Bank, says the warrants market is proving attractive to investors.

"Volumes went through a steep lull in the middle of last year as equity markets fell out of favour with investors. We issue our warrants over the top 40 stocks and the most prominent of these stocks are rand hedge stocks.

However, with the rand's rise against the dollar, a lot of the focus among retail investors shifted to smaller cap stocks.

"In addition, volumes of shares being traded on the JSE Securities Exchange SA have been down in line with global trends. Our market was taking a bit of breather. We came off a peak in the middle of 2002 when volumes were going up dramatically, and the market was ready for a rest," Duncan says.

Feb 16 2004 08:15:29:000AM Business Day 1st Edition