Barclays' Super Track notes linked to Hang Seng China Enterprises seen as attractive bull bet

By Emma Trincal

New York, Jan. 14 - Barclays Bank plc's 0% Super Track notes due July 17, 2014 linked to the Hang Seng China Enterprises index give China bulls an attractive risk/reward profile, financial advisers said.

If the final index level is greater than the initial index level, the payout at maturity will be par plus 150% of the increase, subject to a maximum return of 30.25%, according to a 424B2 filing with the Securities and Exchange Commission.

If the final index level is less than or equal to the initial index level but greater than or equal to the barrier level, the payout will be par. The barrier level will be 80% of the initial index level.

If the final index level is less than the barrier level, investors will be fully exposed to the index's decline from its initial level.

Simplicity

"I like it. It's simple. They haven't made it overly complex. You have two or three metrics and that's it. It's going to do this or it's going to do that. Easy to explain to a client," said Carl Kunhardt, wealth adviser with Quest Capital Management.

Kunhardt said that the annualized cap of about 20% also made the upside potential appealing. With a 150% participation rate, investors are able to reach that maximum return with an index growth of about 13.5% a year, he noted.

"I never mind leverage when it's on the upside. You pay a little bit for that, for instance you have 20% instead of 30% protection. But there's not much there not to like," he said.

The Hang Seng China Enterprises index is a free-float capitalization-weighted index comprised of H-Shares listed on the Hong Kong Stock Exchange and included in the Hang Seng Mainland Composite index. The index has 48 constituents, which represent 60% of the Hong Kong Stock Exchange. Its growth so far this year is nearly 5% as of Monday. Its return for the past 12 months is 17.5%.

Good bet

Kunhardt said he also liked the underlying bullish view on China, which he shares.

"Most of the analysts I read about China tend to be bullish, and I am too," he said.

"People have complained about the slowdown in China, saying it's going to be only 6.5% in growth. I will take 6.5% any day."

For Scott Cramer, president of Cramer & Rauchegger, Inc., the notes offered an attractive balance between risk and reward, although risks should not be underestimated.

"This is for somebody who is bullish on China but wants some downside protection," he said.

"As far as the bet, I believe it's a good bet.

"You're protected up to a 20% drop in the index. I don't think that we'll see that kind of loss in the overall index, although you could."

Because they are buying a capped note with a downside barrier, investors may lose their entire investment once the barrier is breached while they cannot expect to gain more than the maximum return, the prospectus warned in its risk section.

Calculated risk

"There's only one thing: if it goes below 20, you own it," Cramer said.

"I have a tendency to like this note even though you're subject to all of the downside risk with a limited upside. But you do have that 20% protection, and that's the trade-off.

"Overall, I think this is a good trade-off for this index, but I'm not the one who would be making the decision."

While investors should decide where to invest their money, there is a case to be made for being cautiously bullish on China, he said.

"China is having some problems. Their problems are inflation and economic slowdown, but they really are growing even though they are no longer growing at that pace they were growing at," he said.

"Among those large companies, I don't believe that a 20% drop is likely. At least, I don't envision that kind of meltdown there, although I believe that here, we could.

"The large caps have to lose 20%. It's a huge correction for any market. China would really have to be in some serious type of crisis," he said.

Barclays is the agent.

The notes will settle on Thursday.

The Cusip number is 06741TMV6.

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