JPMorgan plans deal on Nasdaq-100, similar deal on Euro Stoxx; exposure matters, trader says

By Emma Trincal

New York, March 12 – JPMorgan Chase Financial Co. LLC is planning two very similar leveraged buffered notes with the underlying index and the capping being the two distinguishing factors.

Investors need to consider the exposure and the asset class first before jumping into a product on the sole basis of its appealing pricing, said a structured notes trader.

JPMorgan plans to price two separate offerings of 0% leveraged buffered notes both maturing on March 31, 2021. Each product offers two-times leverage on the upside and a 10% buffer on the downside.

The first one is linked to the Nasdaq-100 index and will be subject to a cap of 20% to 24%, while the other is based on the Euro Stoxx 50 index and will have no cap, according to separate 424B2 filings with the Securities and Exchange Commission.

Protection for Europe

“There’s still a lot of uncertainty in Europe. You have the Brexit delays ... some monetary policy questions around the European Central Bank and several other issues,” said Matt Rosenberg, sales trader at Halo Investing.

Rosenberg was surprised not to see more downside protection on the European deal.

“We still see a lot of interest in the Euro Stoxx, particularly for its pricing. And I’m surprised not to see more than just a 10% buffer on it. A lot of people may get full principal protection on a short tenor when using the Euro Stoxx ... maybe not with two times the upside, but they’ll get significantly more than that,” he said.

“I think people are seeking Euro Stoxx growth products mainly for that protection element.

“If it was an income product, it would be different. But we see [a] 25%, 30%, 50% buffer or barrier on the Euro Stoxx for growth products.”

Bullish on tech

The strong feature of the notes was the uncapped upside. But that is if investors are really bullish on the Euro Stoxx.

Instead, Rosenberg said he preferred the notes on the Nasdaq despite the cap.

“It’s a very reasonable cap – double-digit returns on an annual basis,” he said

“On the Nasdaq, it’s good to have a 10% buffer. Nasdaq, S&P, Russell ... these are core positions that investors look to. I think people get exposure to the Euro Stoxx because it prices better.

“Personally, I’m much more confident with the U.S. markets.”

One factor was growth. Rosenberg is bullish on the technology sector, which is underweight in the Euro Stoxx.

“You want to have exposure to technology. That’s where growth is. If you can leverage out your exposure with a little bit of protection, that’s a good alternative to being long the index,” he said.

“Everybody knows that technology is a sector that will command the future. What will change are the names.

“A hot stock today may not be so popular tomorrow. Names will change. That’s why the Nasdaq is a good option to play growth in the sector.”

Sluggish asset class

Rosenberg said he is not bullish on the European equity market.

European stocks have been perplexing for investors. The Euro Stoxx has been lagging the S&P 500 index for some time. While some advisers see value in the asset class, others see a “value trap.”

“Market performance in Europe is not terribly exciting,” he said.

“If I had to use the Euro Stoxx, I’d rather use it in a worst of, for income. With that type of structure, the index doesn’t have to go anywhere, which is just fine.”

Best pricing

Asked how the issuer was able to remove the cap on the Euro Stoxx-linked notes but not on the Nasdaq with nearly identical terms, he said that it was not surprising.

“The Euro Stoxx always prices better. Having much higher dividends is the main driver for better pricing. The Euro Stoxx pays much higher dividends than any U.S. index,” he said.

The Euro Stoxx 50 index yields 3.8%. In comparison, the dividend yield of the Nasdaq is less than 1%.

“Most leveraged notes on indices outside of the Euro Stoxx are going to be subject to a cap on a two-year term,” he said.

Both offerings will be guaranteed by JPMorgan Chase & Co. with J.P. Morgan Securities LLC as the agent.

Pricing on both deals will be on March 29.

The Cusip number for the Nasdaq-linked notes is 48130W6J5, and the Cusip number is 48130W6N6 for the other deal.

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