Credit Suisse's notes tied to five Asian indexes offer tactical play on Asian stocks, dollar

By Emma Trincal

New York, Oct. 23 - Credit Suisse AG, Nassau Branch's buffered return enhanced notes due Nov. 14, 2013 linked to a basket of five Asian indexes allow aggressive investors to make a bullish bet on Asia - calling for higher Asian stock prices and a continued weakening of the dollar, sources said.

The basket components are the Hang Seng China Enterprises index with a 30% weight, the Korea Stock Price index 200 with a 26% weight, the MSCI Taiwan index with a 19% weight, the Hang Seng index with a 15% weight and the MSCI Singapore Free index with a 10% weight, according to a 424B2 filing with the Securities and Exchange Commission.

The related currencies are the Hong Kong dollar for the Hang Seng China and Hang Seng indexes, the Korean won for the KOSPI 200, the Taiwan dollar for the MSCI Taiwan and the Singapore dollar for the MSCI Singapore.

If the basket appreciates relative to the U.S. dollar, the payout at maturity will be par plus double the basket return, subject to a cap of 12.4%. Investors will receive par if the basket declines by up to 10% and will lose 1.1111% for every 1% decline beyond 10%.

"It's a tactical play on Asian and Chinese stocks," said Dean Zayed, chief executive of Brookstone Capital Management.

"It's also a bet based on the expectation that the dollar will continue to weaken."

The notes are designed for investors who want two-times leverage exposure to the Asian basket multiplied by the performance of their respective currencies relative to the U.S. dollar, according to the prospectus.

Double whammy

Investors are not only betting on rising Asian stocks but also on a depreciation of the U.S. dollar against those countries' currencies, noted Win Thin, senior currency strategist at Brown Brothers Harriman & Co.

"It makes sense," Thin said.

"This is a risk-on trade. You're betting that Europe is not going to collapse and that we won't go off the cliff in the U.S.," he said.

In his view, the European sovereign debt crisis and the U.S. elections have been two of the main factors that have kept a lid on Asian growth.

The situation has recently improved in the euro zone, which has made some investors more confident about investing outside of the U.S., he said.

Buoyed by low valuations in China and an appetite for risk and encouraged by the Federal Reserve's intent on keeping the dollar weak, investors have lately been adding to their emerging markets allocations, he noted.

"This makes sense for an aggressive investor. As Asian stocks gain, their currency could strengthen. It's a double whammy," he said.

The prospectus warned in its risk section that rising equity prices in some index components may be offset by exchange rates, with the risk being that some of the Asian currencies weaken too much or don't appreciate enough relative to the U.S. dollar.

For Thin, the duration of the notes represents a greater risk.

"It's a one-year out. It's a big bet," he said.

"It's risky even with 10% on the downside.

"I don't know if a 12% cap gives you enough return on a one-year given that type of risk. I'm not sure. It's subjective," he said.

Dollar, technical play

For Zayed, the underlying strategy and terms of the product made the risk worth taking.

"There are a couple of good things in this note," he said.

"First, the Fed seems to be trying to weaken the dollar with its QE ad infinitum. So this note expresses a bearish view on the dollar; it's a bet on the continued dollar decline. The dollar may not fall as much as the Fed would want because China continues to manipulate their currency. But at least, the U.S. policy does not work against that trade. In this context, we should continue to see the dollar weakening further," he said.

"Second, the Chinese stock market is down. From a technical perspective, China may actually be one of the places you may want to be invested because it's a buying opportunity. Asian stocks have grossly underperformed compared to other world equity markets. Now they're a bargain."

Zayed said that the structure of the product was also attractive.

"I like the one-year term and we always love a buffer. Twelve percent is a decent cap for a one-year. It's competitive," he said.

One of the risks involved with a bullish call on Asia however was timing, he said.

"I like Asia as a tactical play. You'll be rewarded in Asian stocks a few years from now given how much those markets have fallen. The question is whether one year will be long enough. Five years from now, somebody will be rewarded for making that bet. But whether that comes to fruition within a year, that's the question," he said.

The notes (Cusip: 22546TF22) will price Oct. 26 and settle Oct. 31.

J.P. Morgan Securities LLC and JPMorgan Chase Bank, NA will act as agents.

The fees are 1%.

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