JPMorgan’s trigger jump securities tied to Euro Stoxx 50 present value, require conviction

By Emma Trincal

New York, Jan. 26 – JPMorgan Chase & Co.’s 0% trigger jump securities due Feb. 2, 2017 linked to the Euro Stoxx 50 index is “a note that has merit,” said Steven Foldes, vice-chairman at Evensky & Katz / Foldes Financial Wealth Management., who liked the terms of the product. But what will incite investors to buy it or not will be their bullish conviction on Europe given that advisers appreciated most of the terms of the product.

If the index finishes at or above the initial level, the payout at maturity will be par of $10 plus the greater of any gain and an upside payment of at least 16% according to an FWP filed with the Securities and Exchange Commission.

If the index finishes down by up to the 90% trigger level, the payout at maturity will be par.

Otherwise, investors will be fully exposed to any losses.

“Normally, I’d say it’s a nice note. It’s basically the Dow in Europe. It’s short-term. I don’t have to make long-term predictions,” said Carl Kunhardt, wealth adviser at Quest Capital Management.

“It’s a generous return, especially without the cap. I wish the barrier would give me more than 10% but it is what it is.

“So I like the structure. I really like the terms.

“But it’s the timing that’s not right. I’m not sure I want to make a Euro-centric investment right now because I don’t know if I understand the implications of this weekend vote.”

Sunday’s Greek elections brought the far-left, anti-austerity Syriza party to power.

Too far right or left

“Are they going to kick Greece out of the European Union? And if they do that, what would it do to the euro zone? In a way, it may not be so bad because you’re getting rid of one of the weakest European countries. Frankly I would think it would help the euro. But the scary part is political. It’s the surge of extremist parties in Europe beyond just Greece that’s a concern. Far-left and far-right parties alike...

“Europe, more so than the U.S., has been very centrist in the past decade. The centrist parties have had a grip on European politics. But now you have a far-left party in Greece. What if Spain goes far-left? And what if the far-right party in France wins the elections? If France goes far-right, the Netherlands will go far-right too.

“It makes you wonder about the stability of the European Union. If the political consensus fractures, what will it do to Europe and to the euro?

“Since I don’t have an answer to any of those questions, I will not jump into European stocks at this point.

“I like stability. Europe has a very definite history of swinging to extremes. It has for hundreds of years.”

The concept of value investing in the European asset class had little appeal to Kunhardt.

“Value investing many times is nothing else but catching a falling knife,” he said.

“People often say that now is a good time to buy the Euro Stoxx because it offers value. Well, sometimes something is cheap for a reason.

“It may be good value, but I’d rather wait. It seems like timing the market, but until I see what’s going on, I won’t put my money in this part of the world.”

Offering terms

For an adviser who is already bullish on European equity, however, the notes offer a very attractive instrument to allocate to this asset class, said Foldes.

“If you want exposure to the Euro Stoxx, this is probably a pretty good way of doing it,” he said.

“The term is relatively short. Two years is not unacceptable.

“JPMorgan credit appears to be a good credit.

“Even though it has a barrier, not a buffer, there is some element of downside protection.

“And you’re not giving anything up for the downside protection because the return is uncapped.

“If you have a modest view, a 16% return makes sense.

“But even if you are more bullish, the fact that there is no cap allows you to fully capture any return in excess of 16%.”

The performance of the Euro Stoxx last year was not good, showing a 9.73% loss, he noted.

“Most of international equity – developed and emerging markets countries – did poorly last year,” he said.

“But if your view is that over the next two years there will be a rebound in Europe, then this makes sense.

“You have some level of downside protection. You get at least 16%. It’s an uncapped exposure. It’s a relatively short-term note with a good credit.

Value

“We’ve been looking for some value deals for our satellite component. This is probably something we will consider because values are somewhat depressed.”

Foldes said he was aware of the political risk in Europe.

“That’s probably why valuations are down,” he said. “We like value plays because things tend to revert to the means.

“Typically when the Euro Stoxx gets much cheaper, you get a pretty big bounce shortly after.”

He offered the following examples. In 2009, after the financial crisis, the Euro Stoxx gained 25%.

During the 2011 debt crisis in Europe, the Euro Stoxx dropped 16.39%. But the following year it was up nearly 23% and it rose 26% in 2013.

“Last year was a pretty nasty year but there might be an overreaction on the downside. After down years we’ve observed robust bounce back,” he said.

“This note has merit. We will explore the possibility of investing in it.”

J.P. Morgan Securities LLC is the agent with Morgan Stanley Smith Barney LLC handling distribution.

The notes will price on Jan. 30.

The Cusip number is 48127R743.

© 2015 Prospect News.
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