Morgan Stanley’s protected notes on Euro Stoxx Select Dividend set to navigate rough markets

By Emma Trincal

New York, March 14 – Morgan Stanley Finance LLC’s 0% equity-linked partial principal at risk securities due March 26, 2021 linked to the Euro Stoxx Select Dividend 30 index give investors a chance to hedge a bear market while maximizing their upside exposure. Market participants said they liked the idea. The downside for investors is to forgo high dividends but in the current market environment many see the tradeoff as worthwhile.

The payout at maturity will be par of $1,000 plus 200% of any index gain, according to an FWP filing with the Securities and Exchange Commission.

If the index declines or finishes flat, investors will receive par plus the index return, subject to a minimum payout of $950 per security.

Dividend plus

“Anytime you put together high dividends and the Euro Stoxx you’re going to get high-yielding return,” said Jason Barsema, co-founder and president of Halo Investing.

The index tracks high-dividend-yielding companies across the 11 euro zone countries.

The 12-month gross dividend yield of the underlying index is 4.64%, according to Stoxx Ltd.

“I like Europe for the price appreciation, not just the dividends. You get very good participation, no cap. It’s a high dividend yield but with 2x leverage, I can make up for the dividends.”

Risk reward

The recent correction has led some investors to become less complacent than they were before, he noted.

“People want more protection in their portfolio.

“Sure you take the first losses. There is a high probability of losses if the market falls. But the customer doesn’t care about losing 5%. They care about being down 20%.”

Principal-protection is regaining popularity as investors realize that volatility spikes can hurt a portfolio as has been the case last month when the market tumbled. Those notes are especially designed to navigate a bear market.

“Nobody really cares to be down 5% when the market drops 40%. As an adviser it’s great. When that happens, the client will tell you: you’re hired for life.

“It’s a very good risk-return from the client’s perspective.”

“The market is choppy at the moment and shows no clear trend. While clients want the upside exposure they also worry about the downside risk,” an industry source said.

“If you’re positive about the market but don’t want to be exposed to a major drawdown, this is the way to go.”

Coming back

A market participant said he has not seen many principal-protected notes recently.

“I like those deals, and if they’re back that would be a great thing,” he said.

Morgan Stanley has priced a number of similar principal-protected notes this year, most of which are tied to the Euro Stoxx 50 index.

The largest one was Royal Bank of Canada’s $30.4 million three-year notes linked to the Euro Stoxx 50 index with a 118% upside participation rate and a minimum payout of 90%. The notes priced on Jan. 31. Morgan Stanley Wealth Management handled distribution

Cheaper zero

One of the ways to price those deals, this market participant said, is to buy a zero-coupon bond maturing at 95. Simultaneously a put spread is put together with the purchase of a put at 95 and the sale of another put at 100. A long at-the-money call provides the leveraged upside.

“With rates higher recently the zero coupon bond is cheaper. That’s more money to go into the options package,” he said.

Principal-protected notes are helpful in the current market environment.

“I don’t mind losing the first 5%. I worry about 25%. These are great when volatility is up. I could do those trades all day,” he said.

Morgan Stanley & Co. LLC is the agent. The guarantor is Morgan Stanley.

The notes will price on March 23 and settle on March 28.

The Cusip number is 61768CM38.

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