HSBC’s buffered AMPS tied to Euro Stoxx 50 show attractive risk-reward profile, advisers say

By Emma Trincal

New York, Feb. 22 – HSBC USA Inc.’s 0% buffered Accelerated Market Participation Securities due March 5, 2020 linked to the Euro Stoxx 50 index offer attractive terms on a relatively short period of time, advisers said.

The payout at maturity will be par plus double any index gain, up to a maximum return of at least 41.5%, according to a 424B2 filing with the Securities and Exchange Commission.

Investors will receive par if the index falls by up to 10% and will lose 1% for every 1% decline beyond 10%.

Good structure

“It’s unbelievable how much they stretched the upside. You get two-times up to 20% a year on a two-year note. That’s neat,” said Steve Doucette, financial adviser at Proctor Financial.

Another beneficial feature in the structure was the hard buffer.

“I do like the notes because I do like to have the guaranteed protection on the downside because I still outperform. With the other type, you can bust the barrier and be long the market,” he said.

Timing is everything

He noted that the risk associated with most structured notes was timing, especially now in the late stages of a nine-year bull market.

“This two-year term.... that’s the only thing in question,” he said.

“It depends on where we are in the market and where we are going. I think we’ll continue to have a momentum for another year. I don’t know about two.”

A possible tradeoff would consist of shortening the tenor or adding more protection in exchange for giving up some of the upside leverage, he said.

“I’d try to catch some of the upside before we get into rocky times,” he said.

Bright economic picture

Jeff Pietsch, head of capital markets at the Institute for Wealth Management, said the risk-adjusted return of the product was compelling.

“Our view is that we’re in a sustained period of global economic growth. Almost all countries in the world have been expanding,” he said.

“For clients who want to be capital-protective, having a 10% buffer brings some peace of mind.

“With the acceleration over two years, you can reach 40%. It’s a reasonable risk-reward. I like it quite a bit for that reason.”

Staying the course

The buffer was not just a safety feature. It would also help clients stick to their investment goals, he said.

“We do expect volatility to be slightly higher over the year ahead. We think having a buffer is an advantage, if only from a psychological standpoint. It gives our clients the necessary peace of mind to sustain themselves as they go through waves of volatility, which in general tends to scare people off, leading them to pull the plug too soon.

“It’s not that our forecast is negative. At the contrary. We’re optimistic about global economic growth. But we know that it will be a rocky road. People tend to get out of the market at the worst possible time.

“You want to stay the course even if volatility goes up. In that regard, the buffer is a great feature.”

Fees

The cost of buying the notes as the sum of the underwriting discount and referral fees is 0.80% at the most, according to the prospectus.

“I’d like to see it lower, close to 60 basis points,” he said.

HSBC Securities (USA) Inc. is the agent.

The notes will price on Feb. 28.

The Cusip number is 40435FSR9.

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