Credit Suisse’s ARES tied to iShares China Large-Cap ETF offer bullish play on Chinese rebound

By Emma Trincal

New York, Feb. 14 – Credit Suisse AG, London Branch’s 0% Accelerated Return Equity Securities due March 26, 2018 linked to the iShares China Large-Cap exchange-traded fund offer an attractive risk-adjusted return for investors who want to join the Chinese rally bandwagon, sources said.

If the ETF return is positive, the payout at maturity will be par plus 200% of the ETF return, subject to a maximum return that is expected to be 21% to 24% and will be set at pricing, according to a 424B2 filing with the Securities and Exchange Commission.

If the ETF return is negative, investors will be exposed to the ETF’s decline.

Upside

“Putting two times up while having a one-to-one exposure on the downside is a reasonable compensation for having a limited upside,” said Steven Jon Kaplan, founder and portfolio manager of TrueContrarian Investments.

The “limited” upside still offered a decent return, he noted. Depending on what the final cap may be, investors may expect from the 13-month investment between 19.25% and 22% per year on a compounded basis.

“It’s a reasonable return. If the ETF is up 11% you get 22%,” he said. “This is a much better note than many others I’ve seen before.

“You’re getting fairly compensated for the risk you’re taking because they’re giving you double.”

Term eyed

Kaplan added that the short-term horizon was also a positive.

He based his view on the recent performance of the U.S. dollar in relation to emerging markets and China.

“The dollar went up a lot last year and yet emerging markets and China did pretty well. They could do even better with a cheaper dollar, and that’s what I think we’re heading to.

“If the dollar drops 20% or 25%, that could produce positive returns for China.”

Turnaround

The Chinese equity market has already staged an impressive turnaround. After a bear market between April 2015 and February of last year, which saw the fund share price plummet 42%, this market has strongly recovered. Since a year ago, the fund has gained 31%.

Still some investors remain skittish about China. For many, China remains “scary” and still represents a contrarian bet after the crash. In addition investors who play emerging markets as a proxy for commodities, limiting their investments to commodities-driven economies may not always be comfortable with China, he explained.

“China is a mixed bag. It’s both a consumer and a producer of commodities, he said.

“It’s certainly not one of the world’s top producers like Australia or South Africa.

“On top of that, China is still not very popular.

“But a little bit of diversification is always good to have in the portfolio,” he said.

And the note enables investors to make a “reasonable return” out of a small appreciation in the underlying fund.

“It’s a good way to play the continued rebound of China following last year’s rally,” he said.

Rich

Tom Balcom, founder of 1650 Wealth Management, said the notes were designed for moderately bullish investors.

“Even if it’s a good cap, if you’re really bullish, you don’t want to limit your upside, especially with China,” he said.

His concern was the valuation of the market and the risk of a correction.

The ETF share price closed at $38.24 on Tuesday. Balcom noticed that the price was “dangerously close” to the 52-week high of $39.00.

“When I invest in a volatile market like China, I typically want to have some level of protection on it,” he said.

“Two times is great to have. But this is a fund that’s been down 2% over the last five years.

“It’s spiked out a lot in the past year. But that’s actually a cause for concern.

“I’m more conservative. If the fund price was down, I would probably want to buy. But this has been going up a little too fast.”

In the past six weeks, the ETF has increased by more than 10%.

Protection necessary

Balcom reasoned that the notes were aimed at investors who anticipate a continued rally but at a milder pace.

However given the asset class volatility, the risk of a downturn was too great in his view.

“I wish I could forecast the Chinese market. I would make tons of money by shorting or going long,” he said. “If you’re someone who sees continued growth in China this would be a good play.

“But I would be cautious at this point and not just about China.

“Most asset classes are near all-time highs. I’m not going long-only with notes anymore.

“I’d rather play defense.

“The notes I’m looking at right now have all some sort of protection built into them.”

Credit Suisse Securities (USA) LLC is the underwriter.

The notes will price on Friday.

The Cusip number is 22548QVF9.

© 2015 Prospect News.
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