HSBC’s barrier AMPS tied to iShares MSCI Brazil Capped designed for turnaround play

By Emma Trincal

New York, May 10 – For investors bullish on Brazilian stocks who still want to play the emerging market country with caution, HSBC USA Inc. plans to price 0% barrier Accelerated Market Participation Securities due May 30, 2019 linked to the iShares MSCI Brazil Capped exchange-traded fund.

The payout at maturity will be par plus double any fund gain, up to a maximum return of at least 34%, according to an FWP filed with the Securities and Exchange Commission.

Investors will receive par if the fund falls by up to 30% and will be fully exposed to any losses if it finishes below the 70% barrier level.

The notes were not designed for the very bullish investor.

Not strongly bullish

“If I’m going to bet on Brazil’s recovery I’d want to see much more upside than 16%,” said Brian Kelly, founder of Brian Kelly Capital.

The terms of the notes with the 34% cap deliver an annualized compounded return of 15.75%.

“It’s a turnaround story. I don’t know what the upside will look like, but if you’re going after that type of return you’d want something more dramatic,” he said. “Somehow the risk-reward doesn’t seem so attractive.”

In 2015, the ETF fell by more than 40%. But last year, the share price soared 65% partly as a result of the election of a new president who took office in August after the impeachment of predecessor Dilma Rousseff.

Brazilian stocks have reflected economic and political troubles, with the country in recession in recent years, crippled by inflation and lower oil prices. Brazil is the 12th largest oil producer in the world.

Value or contrarian investors expect a turnaround this year as president Michel Temer is pushing for pro-growth reforms.

Asymetrical leverage

The notes may be more adequate for some more conservative yet bullish investors seeking a hedge, said Kelly.

The 70% barrier may satisfy those willing to cap their upside for the leverage and the barrier.

The asymetrical leverage offered a significant advantage over the ETF, he said.

An equity investor seeking double upside exposure would have to lever the ETF on the downside as well, which is not so with the structured notes.

“That makes a little bit more sense to me,” he said.

“You couldn’t get this levered up only with the ETF.

“It’s the type of things people do with options. But not everyone trades options.

“For someone who doesn’t have that type of expertise it may make sense.”

Monetizing volatility

A market participant said the 34% cap on a two year was attractive but that it merely reflected the elevated volatility of the underlying.

The iShares MSCI Brazil Capped ETF has an implied volatility of 30% versus 8% for the S&P 500 index.

“Those return enhancement notes are some of the most popular structures we have. It protects you on the downside up to a cap,” he said.

“You have up to 30% of contingent protection on the downside.

“This ETF is very volatile. When an investor is willing to accept the risk of higher volatility they get rewarded more handsomely for taking that risk.

“Bets with more volatility like Brazil give you much more premium as opposed to more commoditized indices that we have here in the U.S.”

HSBC Securities (USA) Inc. is the agent.

The notes will price on May 24 and settle on May 30.

The Cusip number is 40433U5C6.

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