HSBC’s barrier enhanced participation notes on indexes offer long-term bullish bet

By Emma Trincal

New York, Aug. 13 – HSBC USA Inc.’s 0% barrier enhanced participation notes due Sept. 2, 2025 linked to the S&P 500 index, the Russell 2000 index and the Nasdaq 100 index offer uncapped and leveraged exposure for bulls willing to invest over a longer timeframe. For some advisers extended maturities at this time present some advantages.

If each index finishes at or above its initial level, the payout at maturity will be par plus 1.66 times the gain of the worse performing index, according to an FWP filing with the Securities and Exchange Commission.

Investors will receive par if each index falls by no more than 35% and will be fully exposed to any losses of the worst performing index if it finishes below the 65% barrier level.

Uncertainty

Steve Doucette, financial adviser at Proctor Financial, usually avoids long-term equity exposure. But choices may be limited as the near future is fraught with risk.

“If you want U.S. exposure five years out, if you want to tie your money up that long, it’s a nice simple note with 1.66 times on the upside,” he said.

“Here we are at new market highs. We can run for a couple of years, then fall, and the barrier could come out to play.

“Or we could have a pullback, go through the next cycle and be up.... Who knows...Until we can figure out what the global economy is going to look like it’s hard to buy a one-year or 18 month note right now.”

With the Elections in November, the coronavirus pandemic and tensions between the U.S. and China, many advisers are now less eager to invest in short-term products.

“A lot of things can happen over the next few months, and we could see more volatility. Over five years, the market could be down and back up. You wouldn’t think that today since we just lost 20% of our GDP.

“But if the market bounces back, it will be nice to have 1.66 times on the upside with no cap,” he said.

Worst-of

While the three underlying indexes are all U.S. equity benchmarks, which limits the risk related to negative or low correlations, Doucette said he prefers exposure to a single asset.

“The only thing is you’d like to capture as much as possible of the broader markets. With a worst-of you’ll get the underperforming one. I would hate to be stuck with the Russell while the S&P is still cranking,” he said.

“Looking at five years, I would not mind giving up a little bit of the leverage to get every one of them, the three indices together, trying to catch the broad performance.”

Leverage, no cap

Matt Medeiros, president and chief executive of the Institute for Wealth Management, is more interested in longer-dated products, such as this one.

“I like the fact that it’s a five-year note,” he said.

“Although it’s a worst-of, which is not my favorite, the indexes that are within the notes are part of a core portfolio.

“So being long any of them as a core complement to your strategy would be advantageous.”

The terms contributed to diminish part of the problem associated with a worst of payout.

“Since it’s a worst-of, I do like the leverage,” he said.

The leverage but also the unlimited upside made the notes a natural fit for bullish investors.

“For me it’s important when you’re taking equity risk that you get compensated for this risk. That’s why having a no cap in this note is essential,” he said.

Barrier

The main advantage of a long maturity was to reduce the risk on the downside.

“Traditionally I am not a fan of barriers versus buffers. But I’m more comfortable with a barrier if the note has a longer tenor such as this one,” he said.

“The odds of losing some of your principal over a longer time are just smaller. It’s just the probabilities.”

It’s also a good idea to avoid overly short-dated notes in this market, he said, as “political and environmental” challenges are looming.

“I would want more flexibility, more liquidity in my short-term investments at this point,” he said.

HSBC Securities (USA) Inc. is the agent.

The notes will price on Aug. 28 and settle on Sept. 2.

The Cusip number is 40438CRL7.

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