HSBC’s $200,000 market plus notes on Euro Stoxx 50 offer bullish bet on international markets

By Emma Trincal

New York, Sept. 3 – HSBC USA Inc.’s $200,000 of 0% market plus notes due Sept. 2, 2025 linked to the Euro Stoxx 50 index provide uncapped leveraged exposure to an undervalued asset class many believe has upside potential. As such, the product is designed for bulls with a contrarian view.

A knock-out event will occur if the final share price is less than the initial share price by more than 25%, according to a 424B2 filing with the Securities and Exchange Commission.

If a knock-out event has not occurred, the payout at maturity will be par plus the greater of (a) 142% of the index return and (b) zero. If a knock-out event has occurred, investors will lose 1% for every 1% that the final share price is less than the initial share price.

Terms

Steve Doucette, financial adviser at Proctor Financial, said the notes may fit a mean reversion strategy.

“I like that there’s no cap and you’ve got a decent leverage plus a 25% barrier,” he said.

“The real question is the underlying itself. The Euro Stoxx has been lagging the U.S. markets for a while. It’s been disappointing for many people because the index has gone nowhere. At the same time there’s a lot of talk in the market about the Euro Stoxx being able to do OK looking forward, at least from a valuation perspective.”

European financials

One factor which has been dragging down the performance of the euro zone benchmark has been its relatively high weighting in financial stocks, which represent 14% of the index. The S&P 500 index in comparison allocates 9% to financials and the Dow Jones industrial average, 12%.

As has been the case in the United States, the coronavirus pandemic has been weighing on banks’ earnings.

“I would have to do my due diligence and look at the European banks. Conditions are different out there in terms of interest rates and regulations. Can they earn decent spreads on their loans? What types of provisions do they have to set aside against loan losses? That kind of thing,” he said.

International stocks

For bullish investors having no cap over a five-year period is beneficial, he said.

The protection should also be sufficient over the period.

“But you never know; so, it’s good to have a barrier. That 25% protection component is not bad.”

With the vigor of the U.S. stock market rally, many analysts predict that Europe is well-positioned to follow suit. The policy stimulus implemented in Europe should support the recovery in these markets, analysts said.

“We’ve seen recent progresses in Europe. Lately the Euro Stoxx has done better than the EAFE,” he said.

The MSCI EAFE index tracks stocks of developed countries excluding the U.S. and Canada.

“Everyone should be allocating to international stocks. And when you think international, it’s mainly Europe. The U.S. kept outperforming a lot. In theory there should be a reversal. So, you definitely should be rebalancing your portfolio and make sure you have international exposure,” he said.

Beyond tech

Edward Moya, senior market analyst at Oanda, a multi-asset trading firm, alluded to a potential rotation out of technology stocks.

“There is a lot of optimism about Europe right now,” he said.

“In the U.S. it’s technology that’s been feeding the rally. This sector is under-represented in the Euro Stoxx. That’s part of the reason why it hasn’t performed so well.

“But after five months of an extradentary tech rally, we may see a pullback soon. Today may be the beginning of it.”

Investors dumped technology shares on Thursday.

Apple Inc. dropped 8%, Tesla Inc. fell by 9%, Microsoft Corp. lost 6.2% and Amazon.com Inc. slid 4.6%.

The S&P 500 index dropped 3.2%, its biggest sell-off since June, and the Nasdaq composite shed 4.7%.

“Today may be an eye opener. These tech stocks shot up so much. Those moves were exaggerated and overdone. It may be the beginning of a correction,” he said.

“When the world is on the other side of this virus, you’ll see cyclicals and other non-tech sectors catch up.

“That’s when investors will become more optimistic about Europe and that trade will shine.”

HSBC Securities (USA) Inc. is the underwriter. JPMorgan Chase Bank, NA and J.P. Morgan Securities LLC are the placement agents.

HSBC Securities (USA) Inc. is the underwriter. JPMorgan Chase Bank, NA and J.P. Morgan Securities LLC are the placement agents.

The notes settled on Wednesday.

The Cusip number is 40438CUC3.

© 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.