HSBC’s $1.1 million AMPS on Hang Seng China Enterprises aimed at bulls buying the dip

By Emma Trincal

New York, March 1 – HSBC USA Inc.’s $1.1 million of 0% barrier Accelerated Market Participation Securities due Aug. 28, 2019 linked to the Hang Seng China Enterprises index offer investors bullish on China a chance to tap into the recent global equity sell-off to capture an attractive cap and “buy-the-dip,” a distributor said.

The payout at maturity will be par plus 3 times any gain in the index, up to a maximum return of 28.25%, according to a 424B2 filing with the Securities and Exchange Commission.

Investors will receive par if the index falls by up to 20% and will be fully exposed to any losses if the index finishes below the 80% barrier.

The Hang Seng China Enterprises index provides direct exposure to the stocks of mainland China companies trading in Hong Kong.

Mainland China

“How else can you access that market? It’s a way to tap into Chinese growth, which is a unique exposure,” said Matt Rosenberg, sales trader at Halo Investing.

Some international equity exchange-traded funds give investors significant exposure to China. The iShares Emerging Markets ETF, for instance, allocates 30% of its exposure to this market, with giant technology stocks in the portfolio such as Tencent Holdings Ltd., Alibaba Group Holding and Baidu, he said.

“But this note is a way to get a more concentrated exposure to China.”

The three times upside leverage allows investors to easily receive the maximum return in a rising market, he noted.

With a 28.25% cap for the period, they can earn 18% as their maximum annualized compounded return with an annual return in the Chinese index of only 6%.

“If you believe we’ll see normalized performance of 7% to 8% you’re going to cap out,” he said.

Comparing this product to recently priced U.S. equity-linked notes, Rosenberg said that short-term, three-time leveraged deals usually don’t feature barriers or buffers.

Entry point

Just like the S&P 500 index, the Hang Seng China Enterprises index saw some of this year’s earlier gains vanish with last month’s correction. The Hang Seng China Enterprises index has fallen by 9% since its Jan. 26 high.

The S&P 500 index is down 6.80% since it peak at the same time.

“If you’re bullish on China, it’s a way to buy the dip. The index is down almost 10%. If you go back where we were trading before the losses, you’re capped out.”

Cap

Sometimes the ease of hitting the cap may be detrimental to investors if the maximum return is at a low level.

Highly leveraged notes often target moderately bullish investors who want higher probabilities of receiving more modest returns. But Rosenberg said this note did not follow that pattern.

“No one is going to care about capping out at 20% in one-and-a-half years. Most investors would be happy with that return.”

Matt Medeiros, president and chief executive of the Institute for Wealth Management, had no issues with the cap.

“In theory, with that much leverage you could be bumping up against the cap very easily. The index doesn’t have to go up that much to cap out. It would be a good return to have in that 18-month period,” he said.

Volatility

His concern was about whether investors enjoyed sufficient protection on the downside.

“I find China very interesting as an investment opportunity. Their commitment to growth is almost second to none,” he said.

“The government is investing in technology, trying to become the number one economy in the world.”

But asset prices could move wildly in both directions.

“The challenge I see with this structure is that this index is volatile enough that I would be nervous over the next 18 months to see a pullback that would exceed the barrier,” he said.

“When you look at China as an asset class it becomes inherently more volatile on the downside specifically because Chinese markets are not perceived to be transparent.

“Chinese stocks will drop more than U.S. equity in a down market. That’s kind of the problem.”

HSBC Securities (USA) Inc. is the agent.

The notes (CUSIP: 40435FUL9) settled on Wednesday. The fee is 1.25%.

© 2015 Prospect News.
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