JPMorgan’s dual directional buffered notes on S&P, Russell offer short-term bet on economy

By Emma Trincal

New York, July 20 – JPMorgan Chase Financial Co. LLC’s 0% capped dual directional buffered return enhanced notes due Aug. 4, 2022 linked to the lesser performing of the Russell 2000 index and the S&P 500 index offer acceptable terms, but the timing and length of the investment three-and-a-half months ahead of the Elections and in the midst of a pandemic may be too risky, advisers said.

If the final level of each index is greater than its initial level, the payout at maturity will be par plus 1.5 times the lesser-performing index’s return up to a maximum return of at least 20%, according to a 424B2 filing with the Securities and Exchange Commission. The exact maximum return will be determined at pricing.

If the final level of either index is flat or falls by up to 15%, the payout will be par plus the absolute value of the lesser-performing underlying’s return.

Otherwise, investors will lose 1% for every 1% that the lesser-performing index declines beyond 15%.

Headwinds

“If you have to be invested, at least this gives you a buffer,” said Jerry Verseput, president of Veripax Wealth Management.

“As we’re going into the presidential elections, you either stay in cash in order to respond to a higher risk, especially as we get closer.

“Or if you buy a note, you must have a buffer.

“It’s nice to have a 10% buffer. If the market is down 40% at least you save 10%.

“But the two year is pretty short-term,” he said, adding that if a sell-off follows the Elections, there may not be enough time left for the market to recover.

If he had to modify the terms, Verseput might give up the absolute return for a deeper buffer.

But his preferred strategy for now is even more defensive.

“I would rather hold cash so close to the Elections.

“We’re heading into a very risky environment between the pandemic and this presidential transition.

“I would take as little risk as possible.

“If nothing else, I’d rather wait another four months and get to the other side of the Elections, to see how the market responds,” he said.

Longer tenor

Verseput did not think the cap would limit the potential upside.

“I don’t have a lot of confidence in the market going up from here,” he said.

“The S&P would have to go up more than I anticipate. I don’t think you would cap out at 20%.

“So why take the risk?”

Using a leveraged buffered note would make more sense, he said, over a longer timeframe.

“You could accomplish the same thing doing a long-term note.”

This would allow investors to reduce the short-term risk associated with the Elections, give the underlying enough time to recover while compounding higher returns and provide better terms.

Income-oriented notes

Another alternative, which can be implemented right away, is the use of callable contingent coupon notes on indexes with deep barriers. For Verseput, the returns can be higher and the protection thresholds lower.

He gave the example of Barclays Bank plc’s callable contingent coupon note due July 22, 2024 linked to the least performing of the S&P 500 index, the Russell 2000 index and the Dow Jones industrial average. He purchased the notes on Friday.

Each quarter, the notes will pay a contingent coupon at an annual rate of 11.5% if each index closes at or above the 60% coupon barrier level on the observation date for that quarter.

The notes will be callable at par on any quarterly observation.

The payout at maturity will be par plus any coupon unless any index finishes below the 60% barrier level, in which case investors will lose 1% for each 1% decline of the lesser-performing index from its initial level.

“I really prefer a contingent coupon deal like this one that’s going to give me 11.5% with a 40% safety margin,” he said.

While the notes are callable after three months, investors still receive an 11.5% return per annum, he noted.

A bet on the economy

Carl Kunhardt, wealth adviser at Quest Capital Management, said the value of the note depends on one’s outlook on the economy over the next two years.

“We know that of the two indices, the Russell 2000 is going to be the most volatile,” he said.

“We also know that small-cap will lead you to a market recession and they will lead you out of a recession.

“So large-caps offer better protection.”

The top two risks at this time are the economic impact of the pandemic and the outcome of the Presidential Elections, he noted.

Economists, notably JPMorgan, are slashing their fourth-quarter GDP expectations, he said.

“Analysts are getting a little bit more skittish.

“A lot will depend on how states will respond to new Covid-19 cases, whether they reopen or shut down their economies.

“Two years from now, we’ll be way past the Elections.

“But depending on who wins in November we could have a very good market or a not so fun one.

“If they raise taxes for instance, the market will react pretty badly.”

Not a bad alternative

Kunhardt said the “note is not particularly bad. I just don’t like the worst-of. That’s my own personal bias.”

But for investors who hold a view on the direction of the economy, the worst-of index is not so hard to guess, he added. For those who don’t know, the absolute return provides some safety.

“If we have a recession, the worst-of will be the Russell. So, if you’re bearish, you will have exposure to the Russell. You might bypass that 10%. But the buffer is still a nice feature to have,” he said.

“If we’re going to have a recovery, the worst-of will be the S&P because the Russell will outperform. But in that case, it doesn’t matter. The market would be taking off. If we have a recovery, we’ll be in a bull market so who cares at this point?”

Finally, for investors who are neither bullish nor bearish, the notes offer some appeal as well.

“If you are in the middle, if you can’t make up your mind, you’ll be looking at the absolute return feature. With up to a 10% return, you’re better off than being in bonds.

“In all three scenarios, whether you are bullish, bearish or see the market going nowhere, the note is attractive relative to the equivalent strategy – being long the market, short the market or being in bonds,” he said.

The notes will be guaranteed by JPMorgan Chase & Co.

J.P. Morgan Securities LLC is the agent.

The notes (Cusip: 48132MSX0) will price on July 31 and settle on Aug. 4.

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