HSBC's buffered AMPS tied to basket of three country ETFs a play on global growth, source says

By Emma Trincal

New York, Aug. 24 - HSBC USA Inc.'s upcoming 0% buffered Accelerated Market Participation Securities due February 2012 linked to a basket of index funds are designed for investors who are bullish on the global economy and commodities, sources said.

The basket represents three countries - Canada, Australia and Brazil - through three equally weighted exchange-traded funds. Those are the iShares MSCI Canada index fund, the iShares MSCI Australia index fund and the iShares MSCI Brazil index fund, according to an FWP filing with the Securities and Exchange Commission.

The payout at maturity will be par plus double any basket gain, up to a maximum return of 19%. Investors will receive par if the basket falls by up to 10% and will lose 1% for each 1% decline beyond 10%.

Natural resources and banks

Richard Kang, who manages an emerging markets sector ETF and an infrastructure ETF, said that the three countries in the basket share a common "thread" around emerging markets growth and natural resources.

"The top three sectors - energy, mining and banking - are the same for the three countries, not in the same order or in the same weighting, but basically they all have between 50% and 60% in commodities and finance," Kang said.

"Whoever designed this basket is really playing on natural resources and banking."

Kang added that the central theme of the portfolio was infrastructure growth. "You need infrastructure - in other words, bridges, highways, pipelines - to grow an emerging-market economy. But you also need the banks to finance these projects," he said.

Infrastructure growth

Although Brazil is the only ETF out of the three that represents an emerging-market pick, Kang said that the three countries selected in the basket were "in synch" economically.

"Both Canada and Australia trade a lot with emerging markets, and their futures largely depend on infrastructure growth in the emerging markets," Kang said.

No double dip

Jim Delaney, portfolio manager at Market Strategies Management, agreed that the three ETFs constituting the basket had not been picked at random.

"These three countries are considered very commodities-based," he said. "It's a play on global growth. If the world doesn't double dip, people will need raw materials."

Delaney said that he liked the notes' structure with the double exposure to positive gains on the upside and the 10% buffer on the downside.

He said that the 19% cap was the equivalent of approximately a 12% maximum annualized return, a level he felt comfortable with.

"You are betting on global growth, but it's a pretty balanced bet. I would definitely think about buying something like this," he said.

Cheap insurance

The risk for the investor in the notes would be to underperform a direct investment in the three ETFs, Delaney said.

But he said the notes compensated investors adequately for such risk.

"Twelve percent a year is a lot," Delaney said. "Even if in the actual market it's a tie between owning the actual components of the basket and owning this thing, it gives you more upside for anything below that, and it gives you some downside [protection]."

Delaney said that investors may benefit from a market that has been trading range bound.

"For all the dysfunction that's in the market, it could be a pretty attractive piece of paper to own. You go a little sideways: you're good. You go down a bit: you're good. The only thing you're missing on is when things are really good. In this environment, it looks like it's a pretty cheap insurance," Delaney said.

The notes (Cusip 4042K03J2) are expected to price and settle in August.

HSBC Securities (USA) Inc. is the agent.

© 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.