JPMorgan’s $1.35 million leveraged buffered notes on Stoxx designed for cautious Euro bulls

By Emma Trincal

New York, March 30 – JPMorgan Chase Financial Co. LLC’s $1.35 million of 0% uncapped buffered return enhanced notes due March 27, 2026 linked to the Euro Stoxx 50 index provide benefits to bulls and conservative investors alike, advisers said.

If the index gains, the payout at maturity will be par plus 144% of the return of the index, according to a 424B2 filing with the Securities and Exchange Commission. The payout will be par if the index declines but by no more than the 20% buffer. Investors will lose 1% for every 1% that the index declines beyond the buffer.

Financials weighting

“They give you uncapped leverage and a buffer too? That’s pretty good especially three years out,” said Steve Doucette, financial adviser at Proctor Financial.

“One thing to keep an eye on is that there are a lot of banks in the Euro Stoxx. So, it adds more volatility.”

European banks have recently been the source of jitters in the global markets after the takeover of Credit Suisse by UBS engineered by the Swiss regulators and more recently, the jump in the cost of insuring Deutsche Bank’s debt against default.

Financial stocks represent the second largest sector component in the Euro Stoxx 50 index with a 17% weighting after consumer discretionary, which account for 20% of the index.

Structure

“But I like the note,” said Doucette.

“Anytime you give me a guaranteed outperformance in either direction, I like it. You get 1.44 times on the upside and a 20% buffer on the downside. You know you’re going to beat the index no matter what.

“You’re giving up the dividend. But with 1.44x it doesn’t take much to make up for it.”

The index dividend yield is 2.95%.

Reversal

For many years, the Euro Stoxx 50 index underperformed the U.S. equity market, he said.

But the euro zone benchmark has since last year outpaced the return of the S&P 500 index. Over the past 12 months, the Euro Stoxx 50 climbed by 6.65% while the S&P 500 index dropped nearly 11%. The rally in European equities has been steep. The Euro Stoxx 50 has jumped by more than a third since its September low.

Even European financial stocks have outperformed their U.S. counterparts, he said.

“It took some time because technicals have been winning for a while. But here we are. I believe in fundamentals,” he said.

“I’ve always said a reversal to the mean is going to happen. It’s just a question of when. And now that it did happen, the question becomes: will it continue?”

From 2013 to 2020, the S&P 500 index outpaced the Euro Stoxx 50 index each year except in 2017. Only last year did the reversal begin as a result of the equity bear market, which hit the United States in January. For the year to date, the euro zone benchmark has outperformed the S&P 500 by 7.5 percentage points.

Still undervalued

Despite the sharp rally, Doucette said that European stocks remain a value play.

“From a pure valuation perspective, Europe is more attractive. The Euro Stoxx has a P/E in the low teens while the S&P is over 20,” he said.

The current S&P 500 PE ratio is 21.58 versus 13 for the Euro Stoxx.

“Fundamental investors try to find reasonably priced assets. It cuts the risk. The Euro Stoxx is still reasonably priced. So, I think that having no cap on the upside is very neat,” he said.

Buffer first

Matt Medeiros, president and chief executive of the Institute for Wealth Management, favored the size of the protection.

“I like the asset class. Having the leverage is a nice feature since the index has been underperforming for a pretty long time. Now that the trend is shifting, you also have to consider the downside risk. That’s where the 20% buffer is very appealing,” he said.

Medeiros said he always pays attention to the downside protection when considering any note.

“Otherwise, why would I buy a structured note instead of the index fund?” he said.

But caution is even more relevant after a sudden surge in the index performance.

“Investors can’t be too complacent. We’re not out of the woods yet. We have a variety of headwinds to deal with from inflation to recession. In Europe, the banking sector has been volatile.”

While a lot of those banks are well-capitalized, what happened with Credit Suisse remains a source of concern, he noted.

GS Finance’s version

Separately GS Finance Corp. announced another Euro Stoxx-linked note offering with very similar characteristics.

GS Finance plans to price two-and-a-half year buffered notes on the Euro Stoxx 50 index, according to an FWP filing with the SEC.

The upside leveraged participation at 200% is higher and the tenor, shorter. But the return is capped at 39.85% and the 15% buffer is lower.

“Would I cap myself and take a smaller buffer just to get more leverage over a shorter period of time? It all depends on my perspective and on how quickly I think it will go up,” said Doucette.

“If you think it will rebound fast, the cap is fine. And to be fair a 40% cap over three years is a freaking decent return to capture that upside leverage.

“The risk-reward is always a function of what you think will happen.”

The 39.85% cap generates an annualized compounded return of 14.35%.

20% versus 15%

Medeiros said he would stick to the first note with the wider buffer.

“That second one would not be my preference. I’d much rather have more downside protection even with less leverage,” he said.

Because there is still potential for more volatility in the sector, a 20% buffer was much more valuable to this adviser than a 15% one.

“In the current economic environment, I’d rather focus on safety than on leveraging the upside. It turns out that this second note is capped. So, it’s pretty clear to me that the uncapped note with a 20% buffer is the best choice,” he said.

The JPMorgan notes are guaranteed by JPMorgan Chase & Co.

J.P. Morgan Securities LLC is the agent.

The issue date was March 29.

The Cusip number is 48133UVF6.

The fee is 0%.

The GS Finance notes are guaranteed by Goldman Sachs Group, Inc.

Goldman Sachs & Co. LLC is the underwriter. Morgan Stanley Wealth Management is acting as dealer.

The notes will price on Friday and settle on April 5.

The Cusip number is 36265J250.

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