Credit Suisse’s $2.43 million PLUS on basket of BRIC ETFs underweights Brazil’s value play

By Emma Trincal

New York, March 5 – Credit Suisse AG, London Branch’s $2,427,550 of 0% Performance Leveraged Upside Securities due April 7, 2022 offer exposure to four large emerging economies.

A contrarian portfolio manager had no objection to the payout, only to the choice and weighting of the country components.

The equally weighted basket consists of the iShares MSCI Brazil ETF, the iShares China Large-Cap ETF, the iShares MSCI India ETF and the VanEck Vectors Russia ETF, according to a 424B2 filing with the Securities and Exchange Commission.

The payout at maturity will be par of $10 plus triple any basket gain, capped at $12.15 per PLUS.

Investors will be fully exposed to any basket decline.

“It’s a nice change to see something else than a worst-of. At least you have a little bit of diversification with the basket,” said Steven Jon Kaplan, founder and portfolio manager of True Contrarian Investments.

Mildly bullish

“If it’s up a lot you’re not going to benefit. You’re more likely to get a modest return so your expectations should be moderate.

“If you’re very bullish you want to be long the various individual ones.”

The 21.5% cap is the equivalent of a 19.75% annualized compounded return, which can be reached if the basket is up 6.6% per year.

For those volatile markets, a 6.6% annual growth is relatively subdued, he said. But for investors who don’t expect a lot of short-term growth, the structure may deliver the anticipated outcome.

“It’s fair in a certain way. It magnifies the low end of the return. It’s a tradeoff,” he said.

Kaplan said he has “strong views” on emerging markets, a sector he tracks closely.

“My problem with the note is not the structure. It’s the basket that gives the same allocation to four countries with very different valuations. The focus should be on Brazil. It’s just the best of the BRICs right now.”

Goldman Sachs coined the “BRIC” acronym in 2001 with the initials of Brazil, Russia, India and China. Eleven years ago, South Africa joined the group.

Premier market

“I’ve been investing in Brazil and I still do. They just had a political scandal, which is routine over there. Each time there is a political crisis, the market becomes depressed and it’s a good time to get in. You get some kind of a bottom then the trend reverses itself,” he said.

The fundamentals of this country’s economy were also compelling.

“Brazil is one of the better values in the world if you look at the P/E ratio or the average GDP growth,” he said.

The economy of this country shows the highest average GDP growth in the world and the average wage growth is among the highest worldwide, he noted.

“It’s also the world’s best performing stock market,” he added.

From a market low in October 2002 to a high in June 2008 the ETF went up 21.2 times.

“No market in the world in the 21st century ever had that type of run, even the Nasdaq,” he said.

Looking at a secular chart of the Nasdaq-100 index, he identified a low in Oct. 10, 2002 and a recent all-time high on Feb. 16. Between those two points in this century, the U.S. benchmark grew by a factor of 12.78 times.

Political turmoil

“By far, Brazil is the best performing stock market in the world,” he said.

“They call it the country of tomorrow. But things can get a little bit rocky when you have a political crisis.

“I like those events. They provide excellent buying opportunities for a contrarian investor.”

Political crises are indeed common in Brazil.

The current president, Jair Bolsonaro is facing opposition and accusations of corruption.

Former president Dilma Rousseff was impeached in 2016. Another ex-president, Luiz Inacio Lula da Silva, went to jail.

“The timing of this note is very good. There is corruption, scandals, opposition. Today’s price is depressed,” he said.

Three other BRICs

Kaplan said that only one out of the four basket components met his value investing criteria.

“Only Brazil is cheap right now,” he said.

“China has been very trendy and is now very expensive...not as much as the U.S. or even Japan but more expensive than the U.K., France and Germany.”

Indian share prices, which plummeted a year ago, have now doubled, he noted.

“India and China, which make up half of this basket, are overvalued,” he said.

“Russia is neutral, neither expensive nor a bargain.”

The basket could have benefited from other picks.

“There is a number of undervalued countries in the world, including Brazil but also Mexico, Poland and Turkey. Unfortunately, they’re not in the basket,” he said.

Commodities

Brazil offers other advantages, for instance the high liquidity of its stock market.

Brazil's Ibovespa ranks among the top 10 markets worldwide in terms of daily volume, he noted.

Another reason why investors may want to focus more on Brazil than on China and India is the potential reemergence of global inflation, he said.

“If inflation picks up, big commodities producers like Brazil and Russia will benefit. More than half of Brazil’s GDP comes from commodities production,” he said.

“China on the other hand exports a lot of finished products but is a larger importer of food and energy. So, inflation is not going to help China.”

Timing would have made a difference.

“This basket should have been put together at the end of 2018. At the time, China and India were both very cheap. Russia was cheap. Brazil was not. So at least you have 75% of the basket at a fair price. Now only 25% of it is.”

Credit Suisse Securities (USA) LLC is the agent. Morgan Stanley Smith Barney LLC is acting as distributor.

The notes settled on Friday.

The Cusip number is 22551F566.

The fee is 2.25%.

© 2015 Prospect News.
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