JPMorgan’s 15-month PLUS tied to iShares Latin America 40 ETF seen as tactical play on Brazil

By Emma Trincal

New York, May 26 – JPMorgan Chase Financial Co. LLC’s 0% Performance Leveraged Upside Securities due Aug. 30, 2018 linked to the iShares Latin America 40 exchange-traded fund could very well be an opportunistic play after a severe sell-off in Brazil less than two weeks ago, said Paul Weisbruch, vice president of ETF/options sales and trading at State One Financial.

If the fund finishes above its initial level, the payout at maturity will be par of $10.00 plus 300% of the gain, up to a maximum payout of $12.215 per PLUS, according to a 424B2 filing with the Securities and Exchange Commission.

Investors will be fully exposed to any fund decline.

Rarely used

The Latin America 40 ETF has only been occasionally used as an underlier for structured notes.

The largest deal using it was done by Citigroup in September 2009 for $15.6 million. Bank of America priced a smaller one for $4.7 million in 2011. Barclays brought to market four reverse convertibles totaling $7.25 million in the spring of 2008, and UBS issued $115,000 worth of notes in one small deal in 2015, according to data compiled by Prospect News that dates back to Jan. 1, 2007.

Perhaps the not-so-common use of the fund has something to do with its construction.

The iShares Latin America 40 ETF gives exposure to 40 of the largest Latin American stocks. But the distribution by country is predominantly representative of Brazil with a 55% weighting, according to iShares’ website.

Brazil giant

The Brazilian equity market crashed on May 18, dropping 10% at the open on bribery allegations against President Michel Temer. The Brazilian stock market finished the day down 16%.

“It seems to me that they put together this note after the big sell-off,” said Weisbruch.

“My guess is that it would appeal to these investors who were not allocated but believe Brazilian shares have room for some upside.

“There was a politically driven headline, and they are being opportunistic in taking advantage of the recent sell-off.”

Since the May 18 plunge, Brazilian stocks have gained 8%.

For Weisbruch, investors in the notes are probably of the view that most of those Latin American emerging market countries that are sensitive to political risk can quickly recover.

Case in point: Mexico, the second-largest country allocation of the fund with a 27% weighting.

Mexican bull

“Brazil has recovered significantly but not entirely. On the other hand, Mexico has done unbelievably well after a huge sell-off early on this year,” he said.

“That’s another market that clearly was bearishly impacted by political uncertainty. After Trump was elected, the biggest loser was Mexico because of the rhetoric.

“But it went back straight up in less than five months.”

The iShares MSCI Mexico Capped ETF rose 27% from mid-January. The fund, which tracks the Mexican stock market, is now trading at its 52-week high, he noted.

“It’s a tactical play. Mexico is in very good shape right now. That gives you some sort of a hedge because Brazil may recover or it may not. It’s hard to say with talks of impeachment or new elections.”

Hedge

If the Brazilian bet would be the main rationale behind investing in the notes given this country’s weighting, Mexico provides also a healthy hedge, he added.

Investors in the notes are making a tactical allocation to Brazil. But given the surge of the Mexican stock market, the overall growth of the Latin America ETF may be contained, one country hedging the other.

“They may not think there is a huge upside left after the big moves that have already happened,” he said.

“Brazil has recouped some of its losses. Mexico is in bull territory. You might think the cap is fair.”

The iShares Latin America 40 ETF is up 12% this year and 26% for the past 12 months.

“Is another 30% possible after those gains? I wouldn’t bet on it.”

Return enhancement

Ferenc Sanderson, principal at Elizabeth Park Capital Management, said the structure is definitely designed for investors with a modest outlook on Latin American stocks.

“It sounds pretty good when you look at this market over the long term. It’s up now, but it’s been negative over the past three years and also over the past five years.

“If you’re looking at a slightly bullish or even flat market, this type of thing should do really well.

“As long as the global markets are not in a crash scenario and you get moderate but subdued growth, you should get decent returns that will be enhanced by the leverage they put into it.”

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

The notes will be guaranteed by JPMorgan Chase & Co.

The notes were set to price on Friday.

The Cusip number is 48129G802.

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