HSBC’s $14.29 million trigger PLUS on S&P 500 provide lookback for added safety

By Emma Trincal

New York, March 6 – HSBC USA Inc.’s $14.29 million of 0% lookback trigger Performance Leveraged Upside Securities due March 5, 2025 linked to the S&P 500 index give investors the typical ingredients of a growth note such as leverage, cap and barrier, and adding to the mix a lookback, which can be viewed as a risk-reducing feature.

The initial index level will be equal to the lowest closing level of the index on any scheduled trading day during the period from and including the pricing date to and including April 28, according to a 424B2 filing with the Securities and Exchange Commission.

If the final index level is greater than the initial level, the payout at maturity will be par of $10 plus 150% of the gain, subject to a maximum payout of par plus 21.65%.

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

If the final level is less than the trigger price, investors will be fully exposed to the decline.

Consensus view

Carl Kunhardt, wealth adviser at Quest Capital Management, said he liked the defined outcome of the notes.

“I like it,” he said.

“I would prefer a one-year, but anything under three years is kind of in my wheelhouse.”

He first looked at the cap. The 21.65% level was the equivalent of a 10.3% annualized return on a compounded basis.

“The whole equation when making your decision is: can you live with 10% a year?” he said.

Kunhardt downplayed the risk of being “capped out,” arguing that his asset allocation process involved considering not just growth, but a “decent” target return coupled with risk mitigation.

Comfort zone

“Most people expect the S&P to exceed 10% a year over the next two years. That’s the consensus. I think it’s about right. We’ll have a recovery, and the market is likely to exceed 10% a year within the next two years.

“You have to be comfortable with that 10% cap. If the S&P is up more than 10%, I’m fine with it,” he said.

Kunhardt’s personal macroeconomic outlook was aligned with the 10% minimum annualized return for the next two years. His firm however had a more conservative forecast of 7% a year for the next five years.

“The leverage is my safety net, here,” he said.

“If the S&P is up just 7% a year, I’m still getting my 10%. So, the odds of getting it are pretty good. I’m happy to take the 10%.”

Barrier

Kunhardt liked the downside protection as well.

“I like this lookback very much. Most people agree that the most difficult part of this year will be the first half. If you have another pullback in the next couple of months, you may get in at a lower point,” he said.

The 80% barrier was attractive as well. It justified limiting the upside.

“I’m OK with 20% given my economic outlook. You have the lookback. It’s on a single index, which is good.

“I’m basically trading all my return over 10% for a 20% protection. I would do it,” he said.

Unquantifiable future

Another financial adviser was intrigued by the lookback.

“This is very interesting. I haven’t seen any lookback before. It looks like a great feature,” he said.

The value of the lookback however was hard to quantify given that the initial price is only determined at the end of the two-month lookback period.

“It doesn’t really help me in my analysis since I use statistics to evaluate my probabilities of return. It’s a little bit harder when you don’t know your starting point,” he said.

“I wish the lookback would actually be looking backward, two months back to the trade date.”

To assess his probabilities of gains and losses, this adviser used back-testing data on the S&P 500 index over the past 70 years.

Back-testing

Those statistics first raised a red flag associated with the short-term tenor.

“I have a little misgiving with the two-year term given that 80% of the time, the heaviest losses happen with two- to three-year maturities,” he said.

Looking at the statistics, he found that the S&P 500 index would have breached the 80% barrier over a two-year period 5.6% of the time.

“It’s a little bit too high for me. Any probability over 5% makes me uncomfortable. If the barrier was 25% or 30% it would be different. But 20% is a little tight,” he said.

Upside risk

The frequency of gains in excess of the 10% annualized return over two-year rolling periods was relatively high at 41.8%.

“If you can get 10% on an annualized basis, it doesn’t look bad. But you’re very likely to leave money off the table. In fact, you have a 42% probability of leaving money off the table. That’s not an insignificant amount,” he said.

The notes, he said, met his expectations in terms of scoring a double-digit return, but the chances of underperforming the benchmark were too high.

“I like that it’s not a worst-of. But there are other things that bother me. It’s too short of a term. And the 2.5% fee is relatively high. Ten years ago, this type of fee was kind of standard. But not today.”

He was referring to the 2.5% fee disclosed in the prospectus.

“This note hits some of my criteria. The lookback feature looks interesting. Maybe I’m not giving enough credit for it.

“But the downside risk and the chances of missing some of the potential gains are not enticing.

“I can’t pull the trigger on this,” he said.

HSBC Securities (USA) Inc. is the agent with Morgan Stanley Wealth Management handling distribution.

The notes settled on Friday.

The Cusip number is 40441B223.

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