BMO’s bullish enhanced return notes linked to Euro Stoxx 50 aimed at wide range of bulls

By Emma Trincal

New York, Sept. 25 – Bank of Montreal’s 0% bullish enhanced return notes due Oct. 31, 2018 linked to the Euro Stoxx 50 index give investors high leverage over a short tenor but no barrier or buffer, which is the clear trade-off of the notes.

When it comes to interpreting the value of the cap level, buysiders have different views consistent with their market outlooks.

The payout at maturity will be par plus 300% of any index gain, up to a maximum return of 18.6%, according to an FWP filing with the Securities and Exchange Commission.

Investors will lose 1% for each 1% decline.

Credit, term

Steven Foldes, vice-chairman at Evensky & Katz/Foldes Financial Wealth Management, said the Euro Stoxx 50 has the potential to deliver higher returns than the stated cap even though the notes offer in other aspects some advantageous features.

“I’m not too familiar with BMO. But provided that the credit is consistent with some of the major international banks, we would have no issue with them, especially on a one year,” he said.

“We usually don’t go over two years, so one year for us is very attractive in terms of duration.

“We also like the underlying exposure.”

Cap

But Foldes said he wants more upside.

“This is not a bullish note. Notwithstanding the three times leverage, the 18.6% cap over one year is low,” he said.

The actual view of an investor in this product is that the index is only going to generate moderate returns, hence the need for three times leverage, he noted.

“We believe this index can deliver much more on the upside,” he said, adding that he is optimistic about international markets in general, especially European stocks.

“They have taken off post-Brexit, and from a valuation perspective they’re more reasonably priced than U.S. stocks. Why would you want to be capped at 18.6%?

“The absence of any downside protection doesn’t bother me,” he said “but given that I believe European markets can do much better than 6% a year, I would want to take full advantage of the significant uptick.”

The 1.43% fee is also a drawback, he said. If he were to consider the notes, he would renegotiate some of the terms.

“What I would do is give up some of the leverage for a higher cap.”

Asset class

Carl Kunhardt, wealth adviser at Quest Capital Management, is more moderately bullish on the index and said he finds the upside potential attractive because he does not expect equity markets in general to produce the buoyant performance seen in this long bull cycle, which is likely to end sooner than later.

“It’s a note that I would very much like,” Kunhardt said.

He said he likes the Euro Stoxx 50 as an index.

“It’s basically the Dow in Europe. It’s the 50 largest companies.

“It’s also an asset class that you’re going to have in your portfolio anyway.”

The Euro Stoxx 50 has strongly rallied since the spring. For the year, it is up 22% versus 13% for the Dow Jones industrial average.

“It’s clear now that everyone is bullish on the Euro Stoxx 50. People expect European equity markets to do well. But if you’re too optimistic, this note allows you to get a very good return. The index doesn’t have to do that well since you get the three times leverage. And it’s only one year.”

After the bull

Kunhardt said he likes the cap because most market strategists predict subdued equity returns in the coming years.

“We are entering a low-return environment. The most reputable forecasts I hear predict for non-U.S. stocks over 9% a year for the next 20 years.

“The three times exposure on the upside and one-to-one on the downside with an 18% cap are very compelling to me. If we’re up 9% or 10%, you end up outperforming the market very significantly.”

BMO Capital Markets Corp. is the agent.

The notes were scheduled to price on Tuesday and settle on Friday.

The Cusip number is 06367TF54.

© 2015 Prospect News.
All content on this website is protected by copyright law in the U.S. and elsewhere. For the use of the person downloading only.
Redistribution and copying are prohibited by law without written permission in advance from Prospect News.
Redistribution or copying includes e-mailing, printing multiple copies or any other form of reproduction.