Morgan Stanley’s lookback PLUS tied to Euro Stoxx 50 offers Brexit-related short-term play

By Emma Trincal

New York, June 16 – A special feature in the upcoming offering of traditional leveraged capped notes tied to the Eurozone benchmark gives investors with a specific outlook on next week’s U.K. vote on whether to leave the European Union a chance to express their view. But the bet is risky, financial advisers said.

Morgan Stanley plans to price 0% lookback entry Performance Leveraged Upside Securities due Sept. 21, 2017 linked to the Euro Stoxx 50 index, according to an FWP filing with the Securities and Exchange Commission.

The initial index level will be the lowest closing level of the index from the pricing date through July 1.

If the index return is positive, the payout at maturity will be par of $10 plus 150% of the index return, subject to a maximum payout of 18%. If the index return is negative, investors will be fully exposed to the decline.

Market unease

Britain’s referendum on its European Union membership, referred to, as “Brexit” will take place in a week’s time, on June 23.

The Euro Stoxx 50 index tracks large-cap stocks of companies in the eurozone and does not include U.K stocks. But it is widely anticipated that an “exit” vote in the United Kingdom would have negative repercussions on European stocks.

Additionally, market observers expect that a “Brexit” would rock global equity markets, sparking volatility worldwide.

Volatility has already been rising over the past few sessions in the U.S. markets due to worries over the looming U.K. vote. The S&P 500 index has shown a five-days losing streak before finally closing 0.30% up to 2,078 on Thursday, reversing the trend.

Short observation period

Steve Doucette, financial adviser at Proctor Financial, said the lookback was a feature designed to give investors a better entry point should the markets drop as a result of the June 23 vote.

But he questioned whether the observation period –or the amount of time used to lock in the lowest index closing level – was going to be sufficient. The vote will take place less than a week after the trade date, set to be on Friday.

“Then you only have until July 1, which really gives you only a week to get the lower point,” he said.

While entering the trade at a lower point is advantageous for investors, the lookback was not a substitute for protection, he explained.

“The reality is you’re one-to-one on the downside. The price may be 100 tomorrow on the trade date and you could get an entry at 85 in the next two weeks. That’s fine. But you still don’t have a barrier or a buffer. Who is to say that in 15 months, the price won’t drop 30% below that?”

Conviction wanted

Doucette said he was not sure why investors would do a trade that he considered risky. Perhaps a very bullish investor with a strong conviction would find the product appealing, he said.

“I guess if you’re totally convinced that they’re going to stay, then I would understand. If you’re pretty sure the market is going to go up you get some pretty good terms,” he said.

He pointed to the 1.5 times upside leverage up to an 18% cap over 15-months, which translates into more than 14% per annum on a compounded basis.

“The potential in this is on the upside. They cap you but it’s a pretty decent cap. You can do well if the market is up. But that’s if [the United Kingdom voters] decide to stay. What if they don’t? Who can be that confident?

“Maybe someone is doing the note on one side trying to hedge something else on the other side. I’m not sure. I just wouldn’t do something like that without some downside protection.”

Too soon

Matt Medeiros, president and chief executive of the Institute for Wealth Management, would also avoid the notes because he believes the repercussions of a Brexit would be unexpected and long-lasting.

“At this point, in the context of the news we have ahead of us, I would probably pass,” he said.

“Whichever way Brexit goes, I don’t think the price change is going to be absorbed in the first couple of weeks. I definitely think it will take much longer time for the market to absorb the information and absorb the impact.”

Medeiros said that prior to entering any trade or investment, risk has to be assessed.

“The timing of this note, a week before the vote takes the context of risk and amplifies it because it’s not quantifiable,” he said.

Speculative

Placing bets before major events from company earnings to the U.K. referendum is always very risky, he said because investors need to have feel for how the market reacts to the event before “guessing” the outcome, he explained.

“There are people who follow perhaps this issue much closer than I. But nobody knows for sure what’s going to happen. There is a difference between prudent investing and pure speculation. Betting in advance on the outcome of a vote is speculation in my view. I don’t think it’s worth the risk at this point.”

Morgan Stanley & Co. LLC is the agent.

The notes will price on June 17.

The Cusip number is 61766A400.

© 2015 Prospect News.
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