Credit Suisse’s $2.38 million buffered leveraged notes on EM ETF, Stoxx offer pure growth play

By Emma Trincal

New York, March 15 – Credit Suisse AG, London Branch’s $2.38 million of 0% buffered accelerated return equity securities due March 15, 2023 linked to the lowest performing of the iShares MSCI Emerging Markets exchange-traded fund and the Euro Stoxx 50 index provide short-term uncapped leveraged exposure to international equity, a pure bullish play to diversify away from U.S. stocks, advisers said.

If each underlier closes at or above its initial level, the payout at maturity will be par plus 2.1 times the return of the lesser performing underlier, according to a 424B2 filing with the Securities and Exchange Commission.

Investors will receive par if either underlier falls by 5% or less and will lose 1% for every 1% that the lesser-performing index declines beyond 5%.

International pair

Carl Kunhardt, wealth adviser at Quest Capital Management, said the note’s performance will depend on investors’ view on emerging markets.

The pairing of emerging markets and European equity had some similarities with the common choice of two U.S. underliers in many worst-of deals, he noted.

“It looks like the international play on the classic S&P/Russell except that the S&P and the Russell 2000 are looking at the same market, just different market cap strategies. They could have looked at the Euro Stoxx 500 versus the Euro Stoxx Small Cap index but that’s not it,” he said.

First in, first out

If the emerging markets ETF and the Euro Stoxx 50 had nothing in common from a geographic and market capitalization perspectives, they showed however a similarity with the S&P 500/Russell 2000 pair from a macroeconomic standpoint, he said.

“In the U.S., typically small-caps will lead you in and out of a downturn. In international markets, it’s generally the emerging markets that lead the way. They led us into the crisis. Will they lead us out of it?” he said.

That’s the call investors need to make when considering the product, he added.

From health to wealth

So far, emerging markets are facing the challenge of a slow rollout of Covid-19 vaccines while developed countries are beginning to recover, he said.

“Here in the U.S., we’re coming out of Covid because of the vaccines. Vaccines have not reached emerging markets yet. As we’re starting to recover in the U.S. and Europe, emerging markets are still in the midst of the Covid pandemic,” he said.

“While emerging markets led the world to the global downturn, it’s the U.S. now that is leading the way in the global recovery.”

Kunhardt noted a recent rally in the iShares MSCI Emerging Markets ETF.

“But two years is a long time,” he said.

“If emerging markets are far behind due to vaccine supply shortages, then I would assume that the emerging markets ETF will be the worst-of.

“I don’t see emerging markets sustaining growth until they get substantial allocations to the vaccines.”

Dollar impact

On the other hand, the bullish case for emerging markets is not hard to make.

“If you assume that emerging markets are going to quickly recover, which our market already is, then you could see emerging markets soar,” he said.

Emerging markets tend to be very volatile both on the upside and on the downside, he said.

“In this case, you’d be looking at upside volatility. They could easily surpass developed markets. The Euro Stoxx in this scenario would be the worst-of,” he said.

Both scenarios depend on how the new global economic rebound will play out.

Kunhardt said it is not easy to pick the right scenario. But he stressed two factors that make the bullish case for emerging markets more compelling.

The first one is the likely depreciation of the U.S. dollar due to heavy government spending.

“We just passed this $1.9 trillion stimulus bill in addition to other trillions. This is money we’ll have to borrow. It will compress the dollar, which is a positive for emerging markets,” he said.

Two laggards

Another positive for both developed and emerging markets is equity valuation.

“International equity has underperformed the U.S. for so long, we’re going to have some reversion to the mean.

“Both emerging markets and Europe should do better than the U.S,” he said.

One of the appealing aspects of the note was that none of the underliers were U.S. assets, he said.

“They could both go up and still diverge. But it would not be a divergence in direction. It would be a divergence in magnitude. In this case you benefit from the uncapped leverage anyway. If emerging markets are up 40% a year and Europe only 10%, you can’t be too greedy. You’re getting more than double the weaker performance.”

Kunhardt said he did not “like” the note because he is “not a fan” of worst-of deals.

“But I can see how it can be useful in a growth portfolio, he added.

“The 5% buffer is not much. You can pass 5% in a trading day with emerging markets. But the 2.1 times leverage is very attractive.

“I would do the note for a small percentage to enhance growth.”

Lose less

Jerry Verseput, president of Veripax Wealth Management, would want more in downside protection.

“It’s not sufficient. I’d rather have 1.5x leverage and get a 10% to 15% buffer,” he said.

“You need to have a pretty strong conviction that foreign stocks will do well over the next two years.

“If you do, the 2.1 times is incredible, and you still lose 5% less on the downside if things go bad.

“A five- or six-year note is a ‘don’t lose money strategy.”

“This one on a two-year is a ‘lose less money strategy.”

“I use both strategies. Both are good. However, I like to have a buffer a little bit deeper than 5%.”

International bull

The bet on non-U.S. markets was timely, according to this adviser.

“There’s an agreement that we’re printing a lot of money and that it will lower the value of the U.S. dollar.

“Emerging markets could do very well as a result of that and two times leverage is phenomenal,” he said.

The weakening of the dollar is a factor that may increase the correlation between Europe and the emerging markets, he said.

“It might be difficult to gage the relationship between emerging markets and Europe based on historical correlation.

“But as the U.S. continues to print more dollars it’s likely that they will be more correlated in the future than they were in the past.”

U.S. valuations are stretched much higher than anywhere else in the world, he noted.

“I can see both emerging markets and European stocks coming back pretty strongly. They have both underperformed the U.S. for a while. We’re likely to see a rotation into foreign markets.”

In conclusion, the notes would be a good fit for aggressive investors optimistic about foreign stocks.

“It’s a bullish bet. You only get a 5% buffer but with 5% you lose less.

“The key here is to have a strong conviction in non-U.S. markets, and if you have that, why not get two times?”

Credit Suisse Securities (USA) LLC is the agent.

The notes settled on Monday.

The Cusip is 22552XF73.

The fee is 0.8%.

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