HSBC’s trigger PLUS linked to MSCI Emerging Markets ETF offer limited protection, leverage

By Emma Trincal

New York, Dec. 16 – HSBC USA, Inc.’s 0% trigger Performance Leveraged Upside Securities due Dec. 21, 2017 linked to the iShares MSCI Emerging Markets exchange-traded fund provide an alternative to a direct investment in the fund with a barrier, leverage on the upside and a cap.

But sources said that the nature and the amount of the protection are inadequate for the risky asset class.

If the ETF return is positive, the payout at maturity will be par plus at least 200% of the ETF return up to a maximum return of 35.5%, according to an FWP filed with the Securities and Exchange Commission.

Investors will receive par if the ETF declines by 15% or less and will be fully exposed to the ETF’s decline from its initial level if it falls by more than 15%.

Too risky

“I wouldn’t approach this with a long stick,” an industry source said.

“Emerging markets is way too dangerous. It’s way too volatile. The 15% barrier is not a lot.

“I don’t like emerging markets. They’ve been down for years.”

The ETF has declined 23% since early April. The fund has been trading sideways or down since 2011.

Emerging markets have suffered from the commodity rout as many of such countries rely on commodity exports for growth. In addition, the stronger dollar has hurt emerging market countries that have borrowed money in dollars and now face higher repayments, analysts said.

Risk versus reward

Traders consider the fund to be oversold and perhaps attractive from a contrarian standpoint, buysiders said.

But for individual investors, the bet on a two-year term still looks “way too risky,” said the industry source.

“It’s an old cliché ... but think risk-reward. ... When you take risk, you should be rewarded for that,” said this source.

“It doesn’t look like you’re getting a lot of reward here.

“Your upside is locked at 17% a year, and your downside is very poorly protected.

“Emerging markets drop like a rock. Fifteen percent is nothing.”

Barrier

A market participant said the notes are designed for mildly bullish investors who should be willing to take risk due to the protection offered, which he deemed weak.

“The downside barrier is a gimmick, in my opinion. It’s so small ... it doesn’t give you any protection,” he said.

“The payout offers an interesting risk-return. If emerging markets recover and make 5% a year, that’s 10% for the term and 20% for you.

“It’s definitely geared toward bulls.

“But the downside protection is disappointing.”

If the fund drops more than 15%, investors lose the benefit of the protection, which is structured as a barrier, not a buffer, he noted.

“This fund can move a lot. But even in general, within two years any asset class can easily move 15% in either direction,” he said.

“It’s a bullish bet on the market. The cap isn’t bad, but the protection is not great. I would have probably preferred to see the reverse – a more tangible protection even if it meant lowering the cap or reducing the leverage.”

HSBC Securities (USA) Inc. is the agent. Morgan Stanley Wealth Management is distributor.

The notes will price on Friday and settle on Dec. 24.

The Cusip number is 40434E283.

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