Deutsche Bank's notes tied to Asian indexes have sound structure with debatable currency twist

By Emma Trincal

New York, June 23 - Deutsche Bank AG, London Branch's upcoming 0% buffered return enhanced notes due July 11, 2012 linked to a basket of Asian indexes and their related currencies offer a "reasonable" structure and a "good bet" for Asian equity bulls, sources said.

But the currency component of the deal is seen as less desirable.

The basket includes the Hang Seng China Enterprises index with a 30% weight, the Korea Composite Stock Price Index 200 with a 27% weight, the MSCI Taiwan index with a 20% weight, the Hang Seng index with a 14% weight and the MSCI Singapore index with a 9% weight, according to an FWP filing with the Securities and Exchange Commission.

The related currencies are the Hong Kong dollar for the Hang Seng and Hang Seng China Enterprises, the Korean won for the Korea Composite Stock Price 200, the Taiwan dollar for the MSCI Taiwan and the Singapore dollar for the MSCI Singapore.

The basket return will equal the sum of the weighted component returns for the basket indexes.

The component return for each basket index will be based on the equity return as well as the performance of the foreign currency relative to the U.S. dollar, which enables investors to generate additional gains if the U.S. dollar depreciates against the currency.

If the basket return is positive, the payout at maturity will be par plus at least double the basket return, subject to a maximum return of at least 13.8%. Investors will receive par if the basket return is between zero and negative 10% and will lose 1.1111% for every 1% that it is less than negative 10%.

Reasonable structure

"It's a double play on equities and currencies," said Steve Doucette, financial adviser at Proctor Financial.

"The 10% protection with a 14% cap is reasonable. You're capped; you have the protection. It's a way to cover a little bit on both ends.

"If you're slightly bullish on Asian stocks and think the region will trade sideways, it makes sense. You're not sure where it's going to go; you're willing to live with that range.

"Of course if you're really bullish you don't want to restrict yourself in the notes."

Doucette said that he does not have any particular take on the equity performance of the region because his focus when investing in international equity is much broader.

"This note has a regional focus. We just don't do regional bets," he said.

"When I hear of a good idea, it's generally about a global index."

On the other hand, Matt Medeiros, president and chief executive of the Institute for Wealth Management, said that he is bullish on the underlying equity basket.

"The 14% cap is on the edge of what we expect of the equity component, slightly on the mid to low side. But giving up on the cap is warranted for the 10% protection. It's acceptable," he said.

Overweight China

"We are bullish on Asian stocks. We are in favor of a play in Korea, Taiwan, countries historically referred to as emerging markets but that are now becoming more stable and showing more economic growth potential," Medeiros added.

The overweighting in China - the two Hang Seng indexes represent a 44% weight - may be a concern for some investors but not for all of them.

"The slowdown in Chinese activity has become a focal point of markets" Alanna Gregory, an analyst at Barclays, said in a recent global outlook report, who added that 65% of respondents to a recent global macro survey conducted by Barclays identified a Chinese economic slowdown as the largest downside risk in emerging markets. Many believe that inflation and monetary tightening may delay economic growth, the report noted.

Doucette said that the Chinese allocation in the basket is not a concern.

"China is bigger than the other countries in the basket, so it's not unreasonable that they would have the biggest weighting," he said.

Medeiros did not object to the Chinese equity weighting either.

"There are some inflation fears, but the growth prospects in China are still very, very good," Medeiros said.

"If I had an Asia overweight, this note would be an interesting investment."

Currency wildcard

More problematic is the currency exposure embedded in the notes.

As stated in the prospectus, the notes are subject to currency exchange risk.

"If the U.S. dollar strengthens against any of the basket currencies during the term of the notes, your return will be adversely affected," the prospectus warned.

Investors in the notes make the opposite bet: they are bearish on the U.S. dollar against those currencies.

"As a general rule, I'm not into currency bets," said Doucette. "This whole currency market is so crazy, you don't know what's driving it, especially with what's going on in Europe."

But Doucette said that even if he was a currency player, he may not feel comfortable with the underlying basket that combines the performance of the Asian indexes and their related currencies.

"It's a combination of two asset classes, and I don't know if currencies and equities are correlated," said Doucette.

Medeiros said that he also prefers to stay away from currencies.

"I like the equity asset class with these notes. I think it's a good bet," he said.

"The currency component, I'm less confident in. It's just not something we track directly. We like things that are more quantifiable.

"With the equity asset class in this note, we have done our homework and we understand if we like or don't like the asset class and we know why.

"With currencies, it's not that clear because day-to-day changes in geopolitics events have such a great effect on the currency outcome."

The notes (Cusip: 2515A18G9) are expected to price on Friday and settle on Wednesday.

JPMorgan Chase Bank, NA and J.P. Morgan Securities LLC are the agents.

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