HSBC’s $2.48 million buffered uncapped notes on Stoxx, EAFE offer growth for Euro bulls

By Emma Trincal

New York, Jan. 17 – HSBC USA Inc.’s $2.48 million of 0% buffered uncapped market participation securities due Jan. 17, 2025 tied to the least performing of the Euro Stoxx 50 index and the iShares MSCI EAFE ETF allow investors to place a bullish bet on European markets, advisers said.

If the least-performing underlier finishes positive, the payout at maturity will be par plus 1.785 times the gain of that underlier, according to a 424B2 filing with the Securities and Exchange Commission.

Investors will receive par if the worst performer falls by up to 5% and will lose 1% for every 1% decline in the worst performer beyond 5%.

Credit, dividends

Steven Foldes, wealth manager and founder of Evensky & Katz / Foldes Financial Wealth Management, said he liked the notes for a wide range of reasons.

“The creditworthiness of HSBC is fine. It’s a worst-of, but it’s attractive because there’s a high correlation between the two,” he said.

The iShares MSCI EAFE and the Euro Stoxx 50 index overlap. The EAFE fund allocates 62.4% to European equities.

“You’re giving up a pretty handsome dividend on each underlying but in exchange, you’re getting a 1.78x leverage and that’s without a cap, which is a really good formula for growth,” he said.

The dividend yield on the MSCI EAFE ETF is 2.93%. The Euro Stoxx 50 index has a yield of 2.33%.

Foldes also liked the timing and pricing of the deal.

“Both indexes have had a nice recovery. But both are still selling at a discount,” he said.

The MSCI EAFE ETF and the Euro Stoxx 50 index have dropped 10% and 8% respectively from their highs of a year ago.

Big unknown

On the downside, the risks associated with the war in Ukraine warranted a hard buffer.

“I like the idea of having a buffer especially for the next two years, which may be tough,” he said.

“Geopolitical risks seem to be impacting Europe more than the United States, given the war in Ukraine. This war has been going on for almost a year. Many people when it began had no idea it would last that long. How long is it going to last from now? It’s a big unknown.”

Foldes said he was satisfied with the buffer despite its “small size.”

“I would keep the 5% buffer because I wouldn’t want to give up the upside,” he said.

In addition, a buffer even as modest in size as this one still allowed noteholders to outperform on the downside, he added.

Finally, the market itself provided some margin of safety.

“The prices of both indexes are off their highs. Both indexes will be hitting new highs at some point. Whether it happens within two years or not, we don’t know. But history demonstrates that markets do recover.”

Allocation tool

The note offered a good allocation tool for international equities, an area where Foldes invests 25% to 33% of his equity bucket.

“For this portion of the portfolio, this note is attractive in many ways,” he said.

“It’s a solid bank. The worst-of is less risky due to the close correlation between the two. There’s significant leverage and no cap. You’re buying it at a discount. And you do have a small buffer so that if things don’t go too well, you’ll can still get some outperformance.

“I like the note.”

In sync

A financial adviser also pointed to the correlation between the two underliers.

“It’s a 0.97 correlation. That’s almost one and only one underlying. It really reduces the downside risk but also the risk on the upside,” he said.

“If the EFA blows it out of the water and FEZ doesn’t do anything at all, well that’s a risk. But the high correlation between the two is going to minimize such risk.”

The “EFA” is the ticker for the MSCI EAFE ETF, “FEZ,” for the SPDR Euro Stoxx 50 ETF.

Back testing

A look at past performances from each ETF over the past 20 years raised some concerns, he noted.

Over two-year rolling periods, the chances for the iShares MSCI EAFE ETF to finish negative was 25.7%.

The frequency was “even worse” with the Euro Stoxx 50 index at 36.8%, especially when compared to the same statistics for the S&P 500 index, which shows a chance of losses of 17%.

“The Euro Stoxx is not my favorite index. It’s very concentrated and tends to be more volatile.

“The annualized rate of return for those two funds over the past 15 years is very weak. None of this seems very appealing.”

On the way up

Yet, both underliers have strongly recovered over the past three or four months, he noted. In the fourth quarter, the EFA was up 17.7% and FEZ, 26%.

“It’s a strong recovery, a reversion to the mean,” he said.

“And they’re still up this year.”

The EAFE ETF has gained 7% so far this year while the Stoxx ETF is up 11%.

“This is obviously a very bullish note.”

Two years, leverage

The timeframe was long enough to present a brighter macroeconomic picture.

“We’re looking at 2025, well beyond any potential slowdown. In two years, we’ll be out of a recession,” he said.

“The downside risk statistically is significant. I wouldn’t have been in favor of a barrier. But a 5% buffer, I’ll take it. You can beat the worst-of on the downside.”

The leverage was high enough to offset the non-payment of dividends, he said.

“I really like this note,” he said.

“It’s not perfect but it checks all the boxes I’m usually looking for.

“It’s attractive especially if you’re bullish on international markets, which I am.”

HSBC Securities (USA) Inc. is the underwriter.

The notes settled on Tuesday.

The Cusip number is 40441XZW3.

The fee is 0%.

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