HSBC’s buffered AMPS tied to Euro Stoxx 50 offer ‘straightforward’ bet on undervalued index

By Emma Trincal

New York, Sept. 29 – HSBC USA Inc.’s 0% buffered Accelerated Market Participation Securities due Oct. 31, 2018 linked to the Euro Stoxx 50 index offer investors seeking exposure to the European stock market a chance to beat a benchmark, which has lagged the U.S. market for several years, advisers said. The terms of the deal maximize the chances of outperforming the Euro Stoxx unless this index price surges over the next two years, they said.

If the index return is positive, the payout at maturity will be par plus double the index return, subject to a maximum return that is expected to be at least 32% and will be set at pricing, according to an FWP filing with the Securities and Exchange Commission.

Investors will receive par if the index declines by 10% or less and will lose 1% for every 1% that it declines beyond 10%.

“I like these plain-vanilla notes. We do have European equity exposure and we’re trying to decide if we want to replace some of that with these types of notes. You can outperform on the downside. You have two-times leverage. The only time you’re going to regret it is if you hit the cap,” said Steve Doucette, financial adviser at Proctor Financial.

Some other deals

In its prospectus, HSBC announced three other offerings similar to this one.

All three upcoming notes had the same maturity date, upside participation rate and buffer size. The differences were in the underlying and caps.

One upcoming deal was based on the Russell 2000 index with a 20.50% cap over the two-year period; a second was linked to the S&P 500 index with a 17.50% cap; finally the third, with exposure to the iShares MSCI EAFE exchange-traded fund, had a 21% maximum return.

“You get a higher cap with the Euro Stoxx and I guess volatility is what’s driving that,” said Doucette.

“But they are all reasonable caps. Nobody is going to complain about getting 10% or 15% a year if you get capped out.”

The annualized compounded maximum return on the Euro Stoxx notes is 15%. It is about 8.5% for the S&P 500 index deal, 9.75% for the Russell 2000 index-linked product and 10% for the notes linked to the EAFE ETF.

Value play

The choice of one benchmark versus another would depend on the adviser’s asset allocation needs although Doucette said he likes to invest in asset classes that have underperformed.

“Of course you never know in advance which index is going to be the outperformer or the underperformer,” he noted.

“We would have to look at each one of them... the Russell versus the S&P... the EAFE versus the S&P.

“What we know however is that the EAFE and the Euro Stoxx have underperformed the U.S markets. “They’ve done really nothing in the last few years while the S&P continues to go up.”

As a result he anticipated two “likely” scenarios:

“Either the Euro Stoxx will go up more than the S&P in the next two years or it will go down less than the S&P.

“Of course, it could continue to underperform. But historically if you look at reversal to the mean, it is more likely to go the other way.

“So I like those plain-vanilla notes.”

Leverage adjustment

One consideration if the market begins to show a stronger directional trend either bullish or bearish would be to lower the leverage factor in order to boost the cap or add more protection on the downside.

“Ideally you would want both...get more cap and more buffer.

As structured, however, the notes offered a “decent equity substitute,” he said.

“It’s a way to replace your exposure to the Euro Stoxx with some protection, some leverage. It’s a way to hedge and possibly, capture some extra return.”

Easy to understand

Matt Medeiros, president and chief executive of the Institute for Wealth Management, said the simplicity of the structure was appealing.

“I like the idea of the structure being very straightforward. It’s not complicated, there are not a lot of moving parts,” he said.

The Euro Stoxx 50 index was one of the asset classes he said he was interested in because of its relatively low valuation compared to the S&P 500 index.

Lackluster returns

“I do like Europe over the next couple of years. While there are risks, on a historical basis, I think that Europe poses a nice value opportunity.

“I think the cap is in the margins of our return expectations.

Relative to historic returns, he said the 32% level was appropriate: “you need to get a generous enough return to take the risk,” he said.

Since 2008 when it plunged 45%, the Euro Stoxx has shown positive returns only in 2012 and 2013. But those gains – at plus 20.5% and plus 27.5%, respectively – were substantial even if the S&P 500 index did better in 2013 with nearly 33% in return.

The euro zone blue chip benchmark continues to underperform the S&P 500 so far this year with a 6.25% decline versus a 5.5% gain for the U.S. index.

“The Euro Stoxx is undervalued while the valuations of other benchmarks are in the high range,” he said.

“Right now we’re looking for undervalued opportunities, and the Euro Stoxx is certainly one of them.”

HSBC Securities (USA) Inc. is the agent.

The notes will price on Oct. 26 and settle on Oct. 31.

The Cusip number is 40433UWP7.

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