Morgan Stanley’s trigger jump notes on EM, Stoxx designed for bullish international bet

By Emma Trincal

New York, July 15 – Morgan Stanley Finance LLC’s 0% trigger jump securities due July 30, 2026 linked to the worst performing of the Euro Stoxx 50 index and the MSCI Emerging Markets index, give investors several opportunities to capture excess return due to the jump and barrier features, advisers said.

If each index finishes above its initial level, the payout at maturity will be par plus the greater of the lesser-performing index’s return and the upside payment of 50% to 55%, according to an FWP filing with the Securities and Exchange Commission. The exact upside payment will be set at pricing.

If the final level of either index is less than or equal to its initial level, but the final level of each index is greater than or equal to its trigger level, the payout will be par. For each index, the trigger level is 70% of its initial level.

If the final level of either index is less than its trigger level, investors will be exposed to the decline of the lesser-performing index from its initial price.

Outperformance in sight

For advisers with a moderately or even reasonably bullish outlook, the note may deliver better returns than the worst-performing index.

“One thing I like is you’re not capped. If the market is up more than 50%, it’s not going to hurt your exposure,” said Steve Doucette, financial adviser at Proctor Financial.

“You’re going to get at least 10% a year. The more I read market commentaries and listen to analyst calls, the more I get the message that returns are going to be limited to 4% to 7% a year in the next five to 10 years. That’s scary.

“International markets have blown out of the water with the S&P going through the roof.

“As long as you don’t exceed 10% a year, you outperform. But if it goes higher than that, you still capture the upside.

“That’s nice.”

Tenor, barrier

The 70% barrier limits the odds of a loss at maturity by virtue of the five-year term, he said.

“Valuations are high, and you may be wrong. The market could be down at the end. But will it be down more than 30% five years from now?

“In five years, the market could be up, then down and all the way back up again.

“The odds of breaching that barrier in five years to me are pretty slim.

As a result, investors in the notes may outperform “in both directions,” he said.

But to play it safe, Doucette would try and negotiate the protection.

“I’d want to find out how much of the booster I need to give up in order to replace the barrier by a buffer. The buffer would probably be smaller, but I’d still be looking at a 10% to 20% hard protection.”

Overall, Doucette said he liked the note.

“I guess the only downside is if the index is way up, then you don’t gain anything from tying up your money for five years.”

Given current market highs, the risk for investors might be worth taking.

Core base

Matt Medeiros, president and chief executive of the Institute for Wealth Management, saw the notes as a good fit in a diversified portfolio.

“Any asset allocation requires some allocation to international equity. The emerging markets and the Euro Stoxx indices are both core parts of a balanced portfolio,” he said.

The five-year holding period worked well for buy-and-hold investors.

“This is more of a strategic allocation than a tactical play. Five years gives you the opportunity to make a longer-term decision.”

From a defensive standpoint, Medeiros said the tenor was a risk-mitigating element in the structure.

“I would be more concerned if the note were on a shorter timeframe.

“Simple back testing analysis reveals there is a much lower probability of having a loss in any five-year rolling period than there is over a two-year, for instance.”

Medeiros said the notes were not designed for highly bullish investors.

“If you are more bullish, you probably buy the indices not the notes,” he said.

Either way the payout was attractive.

“That minimum return of 50% to 55% over five years is good relative to the indices.

“And if the market moves above that, at least there is no cap, which is something I do like.”

The notes are guaranteed by Morgan Stanley.

Morgan Stanley & Co. LLC is the agent.

The Cusip number is 61773FCJ0.

The notes will price on July 27 and settle on July 30.

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