Deutsche sells BRIC-linked products; higher volume of safer series reflects caution: adviser

By Kenneth Lim

Boston, June 22 - Two recently priced offerings of notes linked to a basket of BRIC currencies reflect investors' continued aversion toward risk, an investment adviser said.

Deutsche Bank AG, through its London branch, priced $37.13 million of zero-coupon 98% principal-protected notes due June 24, 2011 linked to an equally weighted basket of the Brazilian real, Russian ruble, Indian rupee and Chinese renminbi.

A similar offering by the bank, linked to the same basket and maturing at the same time but with only 95% principal protection, sold only $6.02 million.

The 98% principal-protected notes will pay 98% of par plus 163% of any basket appreciation relative to the U.S. dollar at maturity, subject to a maximum total payout of 122.45%.

If the basket depreciates relative to the U.S. dollar, the payout will be 98% of par.

The 95% principal-protected notes will pay 95% of par plus 245% of any basket appreciation relative to the U.S. dollar, subject to a total maximum payout of 131.75%.

If the basket depreciates relative to the U.S. dollar, the payout will be 95% of par.

Still safety first

The different volumes in the two deals could be a sign that investors are still partial to conservative investments at this time, the investment adviser said.

"This is quite interesting," the adviser said. "It's like for every dollar invested in the view that the BRIC currencies are going to appreciate relative to the U.S. dollar, $37 prefers a less risky, lower-return investment for every $6 that prefers a more risky, better-return investment."

But the adviser noted that the discrepancy could also be partly due to the payout structure, which places holders under water right from the start.

"The 98% one has a lower participation rate, but you only need a 1.2% gain in the basket to break even, after which you have a profit," the adviser said. "But you need the basket to be up 2% for the 95% one before you can have a positive return. So it could be that most of the investors are optimistic but not that optimistic."

Cautious advance

The adviser said the risk appetite is slowly beginning to return to investors.

"Yes, it's 98% principal protected, but that also means investors are now willing to put 2% at risk, compared to hiding their cash under the mattress previously," the adviser said.

But the appreciation for ultra-safe products like structured certificates of deposit, which are insured by the Federal Deposit Insurance Corp., will likely remain, the adviser said.

"I don't think it's something that's going to go away," the adviser said. "Yes, when things start to get back to normal, whatever that is, people might start to buy some reverse convertibles again. But I think stuff like structured CDs and principal protected notes; it's like a good Pandora's box that's been opened. People know that one of the best things you can get out of a structured investment is principal protection, and there's always a place in a portfolio for something that protects your capital."

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