JPMorgan’s $5.8 million notes on Stoxx 50 offer worthy terms for a short tenor, advisers say

By Emma Trincal

New York, May 11 – JPMorgan Chase Financial Co. LLC’s $5.8 million of 0% uncapped buffered return enhanced notes due May 7, 2025 linked to the Euro Stoxx 50 index offer an attractive short-term bet on European stocks, advisers said, adding that the terms were unusually competitive due to the short maturity of the product.

If the index gains, the payout at maturity will be par plus 128% of the return of the index, according to a 424B2 filing with the Securities and Exchange Commission.

The payout will be par if the index declines by no more than 20%. Otherwise, investors will lose 1% for every 1% that the index declines beyond 20%.

International exposure

“I can’t believe it’s a two-year and you get 30% leverage plus a 20% buffer. It’s really incredible,” said Steve Doucette, financial adviser at Proctor Financial.

“If you’re down, you beat the market. If you’re up, you beat the market. Those are the notes I like.”

Perhaps the only “flaw” was the non-payment of a hefty dividend yield of 3% over the two-year period.

Most note investors have to forego the dividends of the underlying they get exposure to. In this case, the 1.28 leverage would offset the loss of dividends but with a breakeven return of 11% a year.

The choice of the underlying was justified by the fact that the Euro Stoxx 50 index is used in most international allocations, Doucette noted.

“You’re always going to have it in your portfolio. If you want pure exposure to the euro zone, this is a great note,” he said.

Investors, however, would still need to do their due diligence.

“One factor is the big weight of banks in the index. With all those banks in trouble in the U.S., you have to watch the sector as a whole,” he said.

Financials are the second largest sector in the index with a 17.14% weight after consumer discretionary, accounting for 20.29% of the portfolio. Technology comes in third place with a 15.31% allocation.

Long-term chart

European shares have skyrocketed since the fall. The SPDR Euro Stoxx 50 ETF, which tracks the index, has gained as much as 55% from a one-year low in mid-October at $30.13 to its recent high of $46.68 at the end of April.

But for Doucette, the rally is not over.

“You have to look at the P/E and compare it with the U.S. markets,” he said.

The SPDR Euro Stoxx 50 fund has a price-per-earnings ratio of 14.30 versus 20.75 for the S&P 500 index, he noted.

In addition, Doucette saw limited relevance in watching the short trend observed in the past six-month trend.

“It doesn’t take into account the broader picture if you expand the chart out going back to 2007,” he said.

The ETF closed at $45.67 on Thursday, or 31% off its peak of December 2007 at $66.

Leverage factor

“I’m trying to find the downside of this structure, but I can’t. It’s really a good note,” he said.

Perhaps one limitation compared to owning the shares in the ETF was the fixed maturity, which is the common characteristic of bonds and option contracts.

“After two years, it’s over, while if you own the ETF, you can ride it as long as you want,” he said.

By not being able to extend the term of their investments, noteholders may be more vulnerable to undesirable tax consequences. But the leverage provided some benefits.

“The leverage probably allows you to preserve most of your net return after paying taxes on your long-term capital gains. So, while you can’t hold it indefinitely, leveraging the return allows you to defer the taxes. It pays for the taxes, and you can redeploy your capital later,” he explained.

Inflation

Matt Medeiros, president, and chief executive of the Institute for Wealth Management, also liked the notes.

“Europe is one of the better asset classes at the moment and has been undervalued for some time. I like this market. But I’m cautiously optimistic,” he said.

Persisting inflationary pressure in Europe was his main concern.

“If you look at interest rates and inflation over there, you can spot some potential headwinds. The U.S. has been hiking rates for 15 months and we’re already talking about a pause. But over there, the European Central Bank started a few months later and they haven’t raised rates as aggressively. Inflation remains high, so I’m not sure how far they’re going to need to go,” he said.

With risks of a recession created by an aggressively hawkish monetary policy deployed to tame inflation, European equity markets may turn increasingly volatile.

“I like Europe, but I’m cautious about Europe. I think you have to really take into account the interest rates and inflation outlook,” he said.

Too good to pass

But the terms of the notes were compelling.

“It’s nice to have the leverage without a cap and on a two-year term. That’s very impressive,” he said.

“But perhaps the best part is this 20% buffer. We’ve bought notes with a 20% buffer before, but they were four- or five-year notes.”

Despite the risk associated with the asset class, Medeiros said he remains relatively bullish on European equities.

“I think there is room for upside. Having the leverage plus no cap makes it quite interesting. And the buffer makes me feel relatively comfortable.

“I would consider it,” he said.

The notes are guaranteed by JPMorgan Chase & Co.

J.P. Morgan Securities LLC is the agent.

The notes settled on Monday.

The Cusip number is 48133WGB8.

The fee is 0.4%.

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