Morgan Stanley’s trigger jump notes would bear Euro Stoxx in range-bound market

By Emma Trincal

New York, Feb. 7 – Morgan Stanley Finance LLC’s 0% trigger jump securities due Feb. 13, 2020 linked to the Euro Stoxx 50 index could be used as an alternative to the index fund if the eurozone stock market trades within a range, sources said.

Even taking into account unpaid dividends, investors still have a “reasonable chance” to outperform the underlying benchmark, noted Tom Balcom, founder of 1650 Wealth Management.

If the index finishes at or above its initial level, the payout at maturity will equal par of $10 plus the greater of the return and the upside payment of 31.75%, according to an FWP with the Securities and Exchange Commission.

Investors will receive par if the index falls by up to 30% and will lose 1% for each 1% decline if the index finishes below the 70% trigger level.

Dividends

“The Euro Stoxx has such a big yield, you’re losing about 10% over the three years,” said Balcom.

Holders of the notes, as is the case with most structured products, are exposed to the price return of the index only.

The Euro Stoxx 50 pays a 3.30% dividend yield. Over the life of the notes, it represents about 10% of unpaid return.

“On the downside you’re insulated for the first 30%. On the upside, you get that jump even in a flattish or sideways market. That’s 9.63% annualized. Not bad. And there’s no cap above that,” he said.

“On the flip side, you’re going to lose that 10%.”

Beating the index

Because of the structure however, investors still have a good probability of matching or exceeding the total return of the index.

“The window may be narrowed by the dividends but you can easily do better than the index in a range bound market,” he said.

On the downside any index decline between negative 10% and negative 30% would be ideal for note holders, he explained.

The range would allow them to overcome the drawback of not being paid the dividends while enjoying the benefit of the barrier, he said.

Beyond a 10% index decline, long-only investors would begin to lose money as the buffer-like protection constituted by the dividends would have been exhausted. But the note holders would not.

On the upside, investors in the notes would benefit from the “jump” in a range comprised between the initial price and the 31.75% upside payment. Taking into account the loss of dividends, the notes would outperform the index for any final index gain below 21.75%.

Range bound

“This is a great note if you have a range-bound view on the Euro Stoxx,” he said.

“If the index drops between 30% and 10% on the downside and if it’s up between zero and 22%, it would make sense.

“The dividends narrow the range a little bit, but it’s still doable,” he said.

Balcom said that the note was likely to have a wide appeal as the “range-bound” view on the Euro Stoxx 50 index is relatively widespread.

“We don’t do forecast. But pre-earnings metrics show that the Euro Stoxx is better valued than the S&P.

“I don’t know if Europe is going to rally but I don’t see a 30% crash.

“The Euro Stoxx is a group of very solid companies. They’re not going out of business.

“If you want to add exposure to the asset class, at least this gives you protection on the downside.”

No strong bulls

Donald McCoy, financial advisers at Planners Financial Services, said the notes would be appropriate for mildly bullish investors.

“You’d really have to be very bullish on the eurozone market to not like this,” he said.

“Anything 10% return a year over three years seems pretty good to me. It seems like people would be loading up on this one.

McCoy said that investors were only taking a few risks compared to an investment in the index, citing “not getting the yield,” having credit risk exposure and incurring less liquidity than a fund investment. But the benefits by far offset the negatives.

“It’s an interesting opportunity,” he said.

“I could use it for conservative investors. A 30% protection on a three-year is pretty good.”

McCoy noticed that the notes were not autocallable or callable, unlike similar structures, which he said was another advantage, making the product all the more straightforward.

“It seems like a pretty good deal. You have a pretty high upside with a significant downside protection and no early redemption,” he said.

“All it has to do over three years is be up or flat from what it is right now.

“It seems pretty positive to me and it could work for a number of investors. The exception would be if you’re really strongly bullish.”

Morgan Stanley & Co. LLC is the agent.

Morgan Stanley is the guarantor.

The notes (Cusip: 61766V412) will price on Wednesday and settle on Feb. 13.

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