Deutsche links to S&P 500; absolute return notes could attract moderately optimistic investors, adviser says

By Kenneth Lim

Boston, Dec. 11 - Deutsche Bank AG's principal-protected absolute return barrier notes linked to the S&P 500 index could appeal to investors who are moderately bullish about the U.S. stock market, an investment adviser said.

Deutsche Bank, through its London branch, plans to price two series of principal protected absolute return barrier M-notes linked to the S&P 500.

The first product, which matures June 24, 2010, will pay par plus the absolute index return at maturity as long as the index never closes above 139.5% to 146.5% of its initial level or below 85% of its initial level during the life of the notes. If the barriers are breached, investors will receive par.

The second product, which matures Dec. 27, 2010, has the same structure. But the upper index barrier will be 143% to 150% of the initial level, while the lower index barrier will be 80% of the initial level.

Investors will receive at least par for both products.

The exact barriers will be set at pricing.

Cautious optimism

The notes could attract investors who are cautiously optimistic about U.S. equities, the adviser said.

"I think they could be attractive for investors who think the stock index is going to move in a generally upward direction for the next one to 1.5 years," the adviser said. "If you think the index is going to go down, you would prefer a lower barrier that's lower and an upper barrier that's higher. If you think the index is going to do very well, you probably want something with a higher upper barrier or no cap at all."

The principal protection is also a positive feature, the adviser said.

"Your capital is protected, so your downside is mostly opportunity cost in terms of not making any interest on this product," the adviser said.

Search for returns

Investors could also see the products as ways to get better returns on their investments than cash substitutes, the adviser said.

"These allow you to link your returns to some market with little risk on your principal with the potential to get better returns than plain CDs or government bonds, which have just horrible yields right now," the adviser said. "You have a chance to get the same return as an investment in the equity markets, or even better than the equity markets if they go down, up to a certain point, but without the same amount of risk. But the downside is you could get knocked out even if the index breaks the barrier and comes back in."

Investors who are interested in the product need to be aware of the risks in the structure, the adviser said.

"The volatility of the S&P 500 is very high at the moment, so the barriers, especially the lower barriers on these products, they don't offer as much protection as some people might think they do," the adviser said.

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