JPMorgan’s leveraged notes on Euro Stoxx designed to play recent rally in beaten-down market

By Emma Trincal

New York, Dec. 8 – JPMorgan Chase Financial Co. LLC’s $267,000 of 0% capped buffered return enhanced notes due Dec. 5, 2024 linked to the Euro Stoxx 50 index offer a bullish play on an unpopular asset class recently showing signs of a recovery as evidenced by a sharp rally.

The payout of the notes will be par plus double any index gain, up to a maximum return of par plus 50%, according to a 424B2 filed with the Securities and Exchange Commission.

Investors will receive par if the index falls by up to 10% and will lose 1% for each 1% decline beyond 10%.

Recent rally

Steve Doucette, financial adviser at Proctor Financial, has been bullish on European equities because they underperformed the U.S. for a long time. He said he liked the notes as a way to play an economic and market rebound in Europe.

“The Euro Stoxx has gone through the roof in the past three months. This was a beaten-down index. We saw it as an undervalued asset likely to mean revert. It took some time, but it happened, and it happened quickly,” he said.

The Euro Stoxx index closed at 3,921.27 on Thursday, nearly 20% higher from its Sep. 29 low of 3,279.04.

Limited upside risk

“From the upside perspective, I think this is a decent entry point. We’re up quite a bit already so we’re less likely to hit the cap,” he said.

“That’s how the leverage really helps.”

The 50% maximum return over two years is the equivalent of a 22.5% annualized compounded return, which can be achieved if the Euro Stoxx 50 index rises 12% a year.

“I don’t think anyone is going to complain about getting that type of return,” Doucette said.

Protection

The buffer was also appealing.

“If Covid comes back, if we have a recession, the 10% buffer is a nice way to outperform on the downside,” he said.

“I always prefer a buffer over a barrier because you know that you will outperform.”

Combining leverage and buffer was promising for investors looking to participate in the upside while limiting risk on the downside.

“A low cap would ruin it, but you do have a very decent cap here.

“I do kind of like it,” he said.

Beating the U.S.

Ed Moya, senior market analyst at multi-asset trading firm Oanda, liked the potential return on the upside but was more cautious about market risk.

“We had a very strong rally in the Euro Stoxx in October and November. It could be a bear market rally although it’s always hard to tell,” he said.

“Europe is facing a number of headwinds, but I think it will continue to outperform the U.S. next year.”

The S&P 500 index dropped 17% year to date while the Euro Stoxx 50 index shed 9%.

Mixed picture

Moya expects the Euro Stoxx 50 index to rally but not right away.

“Inflationary pressures are strong in Europe, and the European Central Bank may not be cutting rates quickly. There is still geopolitical risk with Ukraine. Europeans are going to struggle with energy dependency issues for some time. It’s still a difficult environment for European equities,” he said.

“Overall, I think the 50% cap is fine because I don’t expect the Euro Stoxx to gain more than 50% in two years.”

But the downside protection may not be adequate.

“The 10% buffer looks like a nice cushion. But if we retest the lows of September, we could be down easily 15% or more, more than 10% anyway,” he noted.

A glimpse of hope comes from the fact that most of the “bad news” has already been priced in. Recent signs that inflation is easing in the region have contributed to the recent gains in the index.

“My guess is that European markets will have a tough time in the first half of 2023 but will rally in the second half. At some point, inflation will begin to trend lower, and that’s going to drive the recovery,” he said.

If the global economy recovers, the buffer should be sufficient, he said.

“But it’s a wildcard.”

A few factors could add risk such as a worsening of the conflict in Ukraine and a persisting inflation, which would cripple growth.

“Overall, even if I’m cautiously optimistic about Europe, the region is still facing some headwinds. With such uncertainty, I don’t think 10% provides enough protection,” 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 48133PKU6.

The fee is 0.54831%.

© 2015 Prospect News.
All content on this website is protected by copyright law in the U.S. and elsewhere. For the use of the person downloading only.
Redistribution and copying are prohibited by law without written permission in advance from Prospect News.
Redistribution or copying includes e-mailing, printing multiple copies or any other form of reproduction.