HSBC’s barrier leveraged notes on Stoxx, EAFE ETF have potential to outperform, advisers say

By Emma Trincal

New York, June 28 – HSBC USA Inc.’s 0% barrier enhanced participation notes due Jan. 3, 2022 linked to the lesser performing of the Euro Stoxx 50 index and the iShares MSCI EAFE exchange-traded fund offer attractive terms for investors seeking to generate excess return over the market, advisers said.

The payout at maturity will be par plus 2.78 times any gain of the worse performing underlier, according to an FWP filing with the Securities and Exchange Commission.

Investors will receive par if the worse performing underlier declines but by no more than 40%.

Otherwise, the notes will offer full exposure to the decline of the worse performing underlier.

Geographic exposure

“This seems like a pretty good trade for someone who wants exposure to Europe or non-U.S. stocks in developed markets around the world,” said Scott Cramer, president of Cramer & Rauchegger, Inc.

“Either way, you’re getting a lot of European exposure.”

The Euro Stoxx 50 index is the equity benchmark for the euro zone.

The EAFE index allocates 61% to European markets, mostly within the euro zone but also in non-euro zone countries such as the U.K. and Switzerland.

“That’s the reason why you would invest in this note. It’s a bullish play on Europe,” he said.

Asset allocation

For investors seeking this type of exposure, the terms of the notes are appealing, he said.

“You’re getting high leverage. The 40% protection is good. There’s no cap. A three-and-a-half-year term is shortish. There’s a lot to like,” Cramer said.

Cramer said he does not have any particular view on Europe for that time horizon.

“I don’t think the vision for the next three years is as clear as I would like it to be. There’s room for outperformance relative to the S&P. But it could go the other way around.”

As part of an asset allocation, the investments would make sense.

“I wouldn’t want to do this as a single trade. I would do it as part of a portfolio construction. But certainly with 2.78 times leverage, no cap and 40% protection, this note has all the attributes of a very good trade,” he said.

Tenor

Steve Doucette, financial adviser at Proctor Financial, also found the terms attractive.

“This is the kind of simple note that we like,” he said.

“Three-and-a-half years out, there is upside potential. You have this 2.78x leverage and no cap.

“Maybe the market goes all the way down and comes back quickly. You’re levered with no cap, you can outperform on the upside.

“Maybe it’s down at the end. But with a 40% protection you can certainly outperform on the downside.”

Almost perfect

Doucette said that getting 2.78 times leverage was “amazing,” and perhaps not all that necessary.

“I’d be willing to give up some of the leverage for an even bigger downside protection. Maybe try and get 50%.

“I don’t know how much I would get on the barrier if I cut the leverage to 2 times or 1.5 times. But I’d be willing to try.”

A bear market is a scenario which cannot be ruled out, he reasoned. If the protection does not come in the form of a buffer, the barrier has to be deep, even deeper than 40%.

“We know that a bear is coming. The question is when,” he said.

Overall, Doucette said he likes the notes even as is.

“The probability to outperform the market in either direction is pretty high,” he said.

HSBC Securities (USA) Inc. is the agent.

The notes will settle on Tuesday.

The Cusip number is 40435FN45.

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