Buffer brings value to HSBC’s $339,000 leveraged capped notes on S&P, advisers say

By Emma Trincal

New York, July 11 – HSBC USA Inc.’s $339,000 of 0% buffered accelerated market participation securities due Oct. 7, 2024 linked to the S&P 500 index are designed for moderately bullish investors seeking buffered and short-term exposure to the market, advisers said.

The buffer was one of the most attractive features of the structure given its size in relation to the tenor of the notes, one of them said.

If the index return is positive, the payout at maturity will be par plus 150% of the index return, capped at par plus 13.5%, according to a 424B2 filing with the Securities and Exchange Commission.

Investors will receive par if the index falls by 15% or less and will lose 1% for every 1% decline beyond the 15% buffer.

Mildly bullish

“You’re going to get double the return of the risk-free rate but for that you will be assuming some risk,” said Tom Balcom, founder of 1650 Wealth Management.

He was referring to the notes’ annualized compounded maximum return of 10.66% compared to short-term Treasury yields ranging from approximately 5.25% to 5.50%.

“The good thing here is that you have a 15% buffer. I always like to have that.

“If you’re moderately bullish, you can outperform, and it provides protection,” he said.

An increase of 7.15% a year in the underlying index would be sufficient to allow investors to achieve the maximum return.

“We already had a nice year. You want to take some chips off the table in case of a pullback... that would be the thinking of an adviser putting this note on, I suppose,” he said.

Elections

The notes will mature about a month prior to next year’s Presidential Elections.

“Obviously there will be more volatility around that time. It’s always the case just before an election. That’s why it’s good to have a buffer.”

Balcom said that perhaps the anticipated volatility spike could have facilitated the pricing of the buffer.

“I’m actually shocked at the 15% buffer. It’s a pretty large size for such a short-term note. Volatility may have contributed to it. I think interest rates definitely helped, too,” he said.

Better options

A financial adviser was skeptical about the return potential the notes may provide.

“I think I have a greater chance to win an Olympic gold medal than the S&P being up in 15 months,” he said.

For this adviser, the S&P 500 index was at its most overvalued level in history based on the index’s price-per-earnings ratio, price-to-book in history, record inflows and record call buying volume.

“To take a huge risk in the overvalued U.S. equity market in order to get 10% or 11% a year while you can get a 5.5% yield in a Treasury with no risk at all is odd to me,” he said.

“From a risk-adjusted return, it’s a very poor proposition.”

Pain reliever

Most structured notes are linked to the S&P 500 index or to another large U.S. equity benchmark, he said, pointing that it was an issue for him.

“This note is not any worse than most other notes tied to the S&P. In fact, it’s a little bit better since they’re giving you a 15% buffer. With that, you can slightly reduce your losses compared to a long position in the S&P.

“But that’s a small relief. It’s as if you were going to be beaten up for five minutes instead of 10 minutes because the S&P is likely to lose a lot more than 15% between now and October 2024.”

No gains in sight

If the market has rallied so much this year, it was entirely due to the “hype around AI,” he said.

The S&P 500 index jumped by 16% in the first half of the year.

But from a fundamental standpoint, earnings growth has slowed down in 2023 compared to the beginning of 2021, he noted.

“Prices should be lower. But they’re not. People are excited about this year’s rally. They can’t imagine that we’re due for a pullback. The fact that stock prices keep on going up and that we haven’t seen a significant market drop since 2009 should be viewed as a red flag,” he said.

This adviser downplayed the value of the upside payout.

“The terms of the notes are not going to play out except for the buffer. The leverage is only favorable if the market is up. The cap is of no help either. The only positive thing is the buffer.”

Timing and valuations should be important considerations for investors. The same deal in two different market environments would not offer the same value, he said.

“This note would only make sense if the S&P was depressed because you would have a greater chance to see a rebound. But that’s not going to happen now,” he said.

HSBC Securities (USA) Inc. is the agent.

The notes settled on Thursday.

The Cusip number is 40447ACJ1.

The fee is 0.5%.

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