After lukewarm trading in 2012, warrant issuance in Hong Kong is expected to increase this year as capital flows into the equity market in the wake of the mainland economic recovery.
Warrant transactions fell 37 per cent year on year to HK$6.6 billion per day last year while the trading volume of the overall stock market in Hong Kong fell 22 per cent to HK$53.7 billion daily.
"The sluggish market has made issuers reluctant to issue new warrants as the volatility is too low," said Edmond Lee, the director of global equity flow of Societe Generale Securities (Hong Kong).
Investors capitalise on stock market swings by buying call or put warrants on listed securities issued by securities firms. But the volatility of the Hang Seng Index narrowed to 4,000 points last year, the second-least volatile year in the past decade, dampening demand for warrants trading, Lee said.
Lee said the index's volatility would double to 8,000 points this year, translating to a trading range of between 20,000 and 28,000 points, amid the cheap valuation of equity markets in Hong Kong and the mainland among other major asset classes.
The pickup in the warrant market could help to revitalise some dormant issuers.
The number of warrants would rise by 30 per cent over last year when 5,891 were listed, Lee said. He gave no projection for the increase in trading volume of warrants this year.
The uptick in the mainland economy would favour mainland banks and insurance firms, as well as the construction and cement sectors, Lee said.
The demand for warrants in A-share exchange-traded funds (ETF) has been shored up on speculation of a rebound in the A-share market.
More than 200 warrants were issued for A-share ETFs over the past two months.
Shanghai and Shenzhen A shares are trading at 15 times their projected earnings, below the average of 20 times.
Lee said warrant trading would make up 15 per cent of the transactions in the Hong Kong stock exchange this year, compared with 12 per cent last year.