JPMorgan’s 15-month PLUS tied to Euro Stoxx 50 offer ‘hefty’ cap, eurozone bullish bet

By Emma Trincal

New York, May 17 – JPMorgan Chase Financial Co. LLC’s 0% Performance Leveraged Upside Securities due Sept. 6, 2018 linked to the Euro Stoxx 50 index offer an attractive headline cap and a bull play on a popular index, sources said.

The payout at maturity will be par of $10 plus 300% of any index gain, up to a maximum return of 22.5%, according to an FWP filing with the Securities and Exchange Commission.

Investors will be exposed to any losses.

Euro trend

“This is three times up... that’s pretty good...plus the hefty cap,” a market participant said.

The choice of the Euro Stoxx 50 index as the underlying offered pricing advantages. The eurozone benchmark pays a dividend yield of 3% versus 1.9% on the S&P 500 index.

Higher dividends, which are not passed on the note holders, give issuers more leeway in buying the options.

“This deal offers good pricing and people like the non-U.S. exposure,” he said.

“It’s the hot index to buy right now.”

The Euro Stoxx 50 index has gained 17% so far this year. Half of this performance, 8.75% of the rise, occurred after the second round of the French presidential elections on April 23, which saw the victory of centrist candidate Emmanuel Macron against far-right and anti-European candidate Marine Le Pen.

Since the 2008 financial crisis, the performance of the Euro Stoxx 50 index has lagged the S&P 500 index every year except in 2009 and 2012.

Relative value

“People are bullish on the Euro Stoxx. A lot of the uncertainty...like Brexit last year, the French elections this year is cleared up. The index underperformed the S&P for a long time but right now the U.S. markets feel extremely toppish,” the market participant said.

“The S&P has not broken through the 2400 barrier. We keep on touching that upper band but then sellers come in.”

Meanwhile the Euro Stoxx 50 remains far from its December 2007 high.

“If you want growth you go abroad,” he said.

“This looks like a good way to play that bullish theme.”

ARN-like

The short-term structure along with the high cap, strong leverage and lack of downside protection was reminiscent of Bank of America’s best-selling short-term bullish notes, said an industry source.

Morgan Stanley Wealth Management is the dealer, according to the prospectus.

“It sounds to me a little like an Accelerated Return Note,” he said referring to the brand name of BofA Merrill Lynch notes, which show those term, cap, leverage and full downside exposure characteristics.

“I’ve long maintained that what’s more important is not so much innovation and bells and whistles but consistency and simplicity.”

This source did not say whether Morgan Stanley was trying to replicate the types of products that the Merrill Lynch distribution channel distributes successfully. The Performance Leveraged Upside Securities structure has been used for many years by Morgan Stanley.

Consistency

“I’m just saying it’s a model that works. It’s very simple. Advisers can easily understand it. If you can show the same type of product every month creating a consistent calendar, which is what Merrill does, then your advisers are totally comfortable selling it and clients who have missed the bus the month before can jump back in,” he said.

“It’s just a savvy strategy to pursue.”

The deal itself was attractive.

“It looks good just based on the headline cap. Volatility on the Euro Stoxx is much higher than on the S&P and that certainly contributed to a higher cap.”

J.P. Morgan Securities LLC is the underwriter.

The notes will be guaranteed by JPMorgan Chase & Co.

The notes will price on May 31.

The Cusip number is 48129F176.

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