Diversification and innovation: How Europe is enhancing its appeal to investors in Asia

Investors across Asia are becoming more sophisticated in their approaches to the derivatives markets and seeking increased diversification to enhance returns. Given these trends, Europe offers a significant opportunities for firms to diversify and to expand the scope of systematic and algorithmic trading strategies.

In 2024, geopolitical risks have shaped global markets, ranging from regional conflicts in the Middle East and Eastern Europe to trade wars and political instability. 2025 is expected to maintain the trend of volatility and uncertainty as a second Trump presidency leads to a firmly pro-American foreign and trade policy in the U.S., a factor that will significantly impact Asian investors.

Geopolitical risks and regional conflicts disrupt supply chains, elevate commodity prices, and heighten investor uncertainty. These risks necessitate for robust portfolio selections that can mitigate economic shocks and volatility, while capitalizing on opportunities created by price movements.

In response, Asian investors are evolving their strategies to navigate geopolitical turbulence. They focus on sector rotation to invest in defensive sectors and allocate capital to less volatile regions. In addition, Asian investors are increasingly using futures and options to hedge against downside risks in volatile markets. 

Prashant Joshi, APAC Global Markets Head of Regulatory Affairs at BNP Paribas, says: “Diversification is a key trend in Asia today with investors in the region not only investing in the APAC region, but also trading out to the Middle East, Europe and the U.S. Traditionally, the investment flows have been going into Asia from the European and U.S. investors, but we are seeing much more flow the other way.” 

Donald Trump’s return to the U.S. presidency could reignite trade tensions with China, a critical trading partner for many Asian economies. This could lead to increased market volatility, disruptions in Asian export-driven industries, and an increased demand for investment outside the region to diversify exposures.

Hugh Kerridge, Business Development Manager at Flow Traders, says: “There has definitely been a significant increase in interest to trade globally from Asia. For example, Chinese funds are increasingly trading globally via Hong Kong. At the same time, hedge funds and other Asia-based investors are becoming much more sophisticated.”  

Opportunities in Europe

In 2024, European equity markets have shown resilience amid global uncertainty. The key drivers of this performance include the post-COVID recovery, the strength of Europe’s sectors in energy, green technology and luxury goods, as well as the European Central Bank’s cautious approach to interest rates. All these factors have provided relative stability for investors in Asia. 

Another factor driving interest in investing in Europe from Asia is the relative lack of fragmentation in European markets compared to Asia.  

Kerridge says: “Asian markets are very fragmented with different regulatory environments, different market access requirements, and different currencies, which makes it challenging for investors to trade efficiently across the APAC region.” 

Rui Fukuda, Head of APAC F&O Execution Sales at J.P. Morgan in Singapore, adds that this fragmentation is impacting how firms in Asia can trade. “If you are long MSCI World and short MSCI Emerging Markets, you can get margin offsets for that position but only if it is traded on the same exchange. If the products are traded at two different exchanges that removes the benefit.”  

Eurex’s strategy combining equity contracts offering global exposure with fixed income contracts covering the full European yield curve is driving increased capital and post-trade efficiency.  

Kerridge says: “At Eurex, you have multiple asset classes and contracts on one exchange in one trading environment. On the equity side, you have always had core country indexes, such as MSCI Japan and MSCI Korea, but now you can also access other indexes such as MSCI Emerging Markets Asia, and MSCI ASEAN, as well as a range of MSCI Factor and ESG Indexes.”

“Also on Eurex, but outside the MSCI space, there are products listed such as the STOXX Semiconductor Index futures and other sector-based futures, which offer investors thematic exposure.”  

In addition to sector-based futures, Eurex sees strong growth in its broad-based indexes such as STOXX^® Europe 600, MSCI Europe, and MSCI World. These indexes provide broad exposure across a wide range of sectors and geographies, reducing risk and volatility compared to narrower indexes or single-stock investments.  

The STOXX^® Europe 600 index offers exposure to 600 leading European companies across 17 countries, while the MSCI World index provides a global perspective, allowing Asian investors to hedge both regional and global risks. 

Futurization and growth

The development of TRFs was driven by the need to address the inefficiencies and risks associated with traditional over-the-counter total return swaps (TRSs). Swaps have long been a popular instrument among institutional investors for gaining synthetic exposure to equity indexes and individual stocks.

However, post-financial crisis reforms and then the subsequent development of the Uncleared Margin Rules (UMR) significantly increased the cost of OTC derivatives by imposing stricter capital and collateral requirements.

In response, Eurex "futurize" these instruments by developing exchange-traded and centrally cleared Total Return Futures. By transforming a bespoke OTC product into a standardized listed product, costs are reduced and transparency is enhanced for market participants.

TRFs provide a range of benefits to investors, addressing many of the pain points associated with traditional OTC instruments, such as reduced counterparty risk, lower costs, enhanced transparency and increased operational efficiency. 

Fukuda says: “UMR is driving clients to trade more listed products, such as moving from total return swaps to total return futures, especially in Europe and the U.S. Recently the uptake of the listed version of traditional swaps has increased owing to the funding squeeze around the election. As we see more and more of the larger global players move into these products, I expect more local clients in Asia will participate as liquidity builds, creating more volume.”  

In addition, Joshi believes that futurization is proving to be a useful tool for price discovery in new products in Asian markets as regional economies look to grow and enhance their capital markets. 

Another area in which Fukuda sees potential growth is in the development of credit index futures, which he says have “significant potential”, but liquidity is expected to grow first in the U.S. and Europe before adoption becomes more widespread in Asia.  

Growing the appeal of fixed income

Fixed income derivatives were historically less popular in Asia compared to equities and FX. There are several reasons for this, including the relatively underdeveloped fixed-income markets in the region and the limited availability of highly liquid local products.

Despite this, there are growing opportunities for fixed income growth among Asian investors. The increased international outlook among investors will lead to growing demand for hedging cross-border risks associated with government and corporate bond holdings. At the same time, divergent interest rate trajectories between the major international jurisdictions will create opportunities for firms to profit.

Eurex has been expanding its range of products and services to enhance its position as the "Home of the Euro Yield Curve": Since the relaunch of Euribor futures and options in November 2023, 50 million contracts have been traded in STIR Futures by the end of November 2024, with both €STR Futures and Euribor Futures surpassing 25 million contracts each.

Meanwhile in OTC Clearing, Eurex has grown its footprint in the Euro-denominated OTC IRD market with a notional outstanding of €35 trillion. Market participants are following developments around EMIR 3.0 closely, which will require firms subject to the EU clearing obligation to maintain an active account, including minimum activity provisions at an EU CCP for EUR and Polish Zloty-denominated OTC IRD and EUR STIR business. This will further strengthen Eurex's position in Euro swaps clearing as well as STIRs, especially as Eurex is the only venue currently able to offer its clients margin offsets across OTC IRD and listed EUR rates derivatives.

Jens Quiram, Eurex's Head of Global FIC Derivatives and Repo Sales, emphasized that Asian clients, while not directly impacted by EMIR 3.0, are strongly advised to speak to their clearers about their ability to clear EUR OTC IRD with Eurex alongside their current venue of choice. Only in this way will they be able to maintain their ability to trade with the full range of possible counterparties at all times and thus safeguard their continued access to best execution.