HSBC’s PLUS with 46% cap linked to iShares FTSE China offer bullish play, unprotected exposure

By Emma Trincal

New York, Aug. 14 – HSBC USA Inc.’s 0% Performance Leveraged Upside Securities due Aug. 29, 2016 linked to the iShares FTSE China Large-Cap exchange-traded fund represent a viable alternative to a direct exposure to the underlying fund but only for bullish investors who are willing to invest with no downside protection in order to capture more upside potential, according to buysiders.

The payout at maturity will be par of $10 plus double any gain in the fund, up to a maximum return of 46%. Investors will be exposed to any losses, according to a 424B2 filing with the Securities and Exchange Commission.

The underlying ETF is listed on the NYSE Arca under the ticker symbol “FXI” and tracks the FTSE China 25 index. This index represents the performance of 25 of the largest and most liquid Chinese companies that publicly trade on the Hong Kong Stock Exchange.

Kirk Chisholm, principal and wealth manager of NUA Advisors and who is bullish on China, said the notes offer a “reasonable solution” to getting exposure to the asset class based on his technical outlook.

The shorter maturity is also valuable.

“I like the term. Two years is a good time. It’s kind of my limit for this environment, for what I think is acceptable,” he said.

The notes offer no downside protection, but the fact that only the upside is leveraged and not the downside is “appealing,” he said.

Bullish signals

“We’ve been watching China for a while. From a technical perspective, it’s been pretty flat, but it looks like it’s breaking out of its range at the moment, so we’re bullish at this time. This note might be appealing if you’re bullish,” he said.

China still has a lot of fundamentals problems, he noted, in particular in its financial sector. But the government has taken steps to address the situation, trying not to overinflate the economy while shoring it up.

“The Chinese government has been striking a balance between managing growth and managing expectations, going through periods of tightening followed by times when they open back the spigots. It’s not a permanent solution, but they have provided support for the markets,” he said.

“I am bullish on the FXI on a technical basis. It’s been going sideways since 2008, but it looks like it’s starting to break out.”

The cap is 21% per annum on a compounded basis, he noted, adding that it takes less than 11% of annual growth for investors to reach the maximum return.

“It’s not a stretch,” he said.

Risk versus reward

Chisholm downplayed the impact of having no downside protection for two reasons. One is the asymetrical leverage, which does not amplify losses on the downside but amplifies returns on the upside.

The second reason is based on his technical analysis.

“The downside risk is minimum in my opinion. I don’t think you’re going to lose all that much. If it stays within this range for the next couple of years, your losses would be limited, and I think the risk is low that it would break below that range. The probabilities are in favor of the index going up rather than down, at least from a technical standpoint,” he said.

“If you want to invest in China, I think this is a good solution. If you’re bullish, it’s a reasonable way to get exposure to this market.”

No real benefits

Matt Medeiros, president and chief executive of the Institute for Wealth Management, said the lack of downside protection is a serious drawback.

“I don’t understand the trade. If you’re bullish on this index, there are other ways to get leverage without having to go through a note with a cap,” he said.

“If the note doesn’t provide you other benefits such as downside protection, I’m not sure why you would use that type of structure.

“You’re taking on credit risk. You’re sacrificing the liquidity. I don’t see what’s valuable when a note has no other benefit than the leverage on the upside.

“Instead of using this product, you could do option strategies, for instance, and not subject yourself to credit risk or give up liquidity.”

Medeiros said that he is not necessarily very bullish on China.

“China is a big country. A lot can happen. The asset class certainly provides some opportunities, but I wouldn’t say China is outperforming compared to the U.S. And certainly there are plenty of risks associated with this market,” he said.

HSBC Securities (USA) Inc. is the agent with Morgan Stanley Wealth Management as distributor.

The notes will price Aug. 22 and settle Aug. 27.

The Cusip number is 40434D814.

© 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.