HSBC’s autocalls with step-up premium on index, ETF offer income alternative, adviser says

By Emma Trincal

New York, Feb. 24 – HSBC USA Inc. plans to price 0% autocallable barrier notes with step-up premium due March 23, 2026 linked to the lesser performing of the iShares MSCI Emerging Markets ETF and the Russell 2000 index, according to an FWP filing with the Securities and Exchange Commission.

The notes will be called at par plus a minimum 12.25% annualized call premium if each underlying closes at or above its initial level on any annual observation date.

If the notes are not called, the payout will be par unless any underlying has finished below its 70% barrier level, in which case investors will lose 1% for each 1% decline of the least-performing underlying from its initial level.

Correlations

“This can be used as a fixed-income substitute. That’s usually what we use those autocalls for,” said Steve Doucette, financial adviser at Proctor Financial.

The two underliers offered fair values in the context of the current correction, but together posed correlation risk, he noted.

“The Russell and the emerging markets are significantly down this year,” he said.

The Russell 2000 index lost nearly 15% of its value since its Jan. 4 high. The iShares Emerging Markets fund is also in correction territory for the year.

“But they have started to diverge, and you want high correlations when you do a worst-of,” he said.

The coefficient of correlation between the U.S. small-cap index and the emerging markets benchmark is 0.76. In comparison the correlation between the two U.S. large-cap indexes – S&P 500 and Dow Jones industrial average – is 0.98.

“At the same time, we’re in a down market and everything is correlated in a down market.

“The indices have already retreated. But who knows? Now that there is this war in Ukraine, who knows what the world will bring?” he said.

Resilient economy

The terms of the deal however were favorable to investors, he noted.

“12%. That’s a pretty hefty coupon. Over four years we may have a bear market, or we may be off to the races. But because it’s a four-year, I think you’re pretty safe.

“You’re more likely to be called. It’s a snowball and you have that memory feature. You can get paid later. You’re buying time.”

“If you look for income, you may have to wait a while. But ultimately, you’ll get there,” he said.

The sudden war in Europe heightens uncertainty, he said. But the economy may be more resilient than expected.

“We already had a pullback. We still have a lot of pent-up demand from the pandemic. From an economic perspective, I don’t think we’re going to collapse,” he said.

Mildly bullish play

A financial adviser said that equity markets remained overvalued based on the cyclically adjusted price-to-earnings (CAPE) ratio. The metric, also known as the Shiller P/E, is used to measure valuations adjusted for inflation over the past 10 years.

“This is a four-year timeframe, so it’s relatively long-term. While these indices have underperformed, they’re still on the high-end if you look at a 10-year horizon.

“A conservative client with a moderate outlook on equity returns may be willing to give up the upside. If they expect single-digit gains over the next four years as opposed to 27% a year, then I can see this note as being appealing,” he said.

Four-year tenor

Matt Medeiros, president and chief executive of the Institute for Wealth Management, said the length of the notes was suitable.

“I like the four-year tenor, particularly as the market pulls back due to Russia’s invasion of Ukraine,” he said.

“Over the term of this note, the indices should be close to a full cycle.”

The risk associated with the trade would be holding the notes to maturity. Such outcome would mean that no automatic call ever happened and that at least one of the underliers would finish negative.

“That’s the main concern,” he said.

“Two things can happen. You haven’t breached the barrier and you get your money back. No gain. No loss. That’s an opportunity cost. Or you breach the barrier. That’s the worst-case scenario,” he said.

“But you’re getting a fair return for that risk and in my view it’s a limited risk because the chances of getting called prior to maturity are fairly high.

“So, I think it’s a pretty attractive note.”

HSBC Securities (USA) Inc. is the agent.

The notes will price on March 18 and settle on March 23.

The Cusip number is 40439JC86.

© 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.