HSBC’s AMPS tied to Russell 2000 to offer good entry for short-term, mildly bullish bet

By Emma Trincal

New York, Feb. 12 – The recent market selloff may provide a better entry point for investors seeking exposure to the small-cap U.S. equity market, an adviser said. HSBC USA Inc.’s 0% buffered Accelerated Market Participation Securities due Feb. 18, 2020 linked to the Russell 2000 index offered an example.

The payout at maturity will be par plus double any index gain, up to a maximum return of 19.25%, 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%.

“Not too bad,” said Andrew Valentine Pool, main trader at Regatta Research & Money Management, about the notes.

“The cap of 19% and the 10%, those two things are of interest.

“The pro is: we like the buffer, just in case. Any buffer is a good buffer.

“The con would be that the small-cap index has had such a good runup already.”

But current market conditions made the notes attractive, he said.

The index closed at 1,490.98 on Monday, or 7.7% lower than its all-time-high at the end of January. Monday was the set pricing date for the notes. The Russell 2000 index is down 3% for the year.

Improved valuations

“This would be an entry point for us,” Pool added.

“If the deal was going to price in a couple of weeks, it would be a different risk. But as of today, we like that level, which is right in the channel of support.”

Pool’s confidence was not just based on technical analysis. His view on the economy is bullish and he has been waiting for a pullback in order to get better bargains in stocks.

“I think we’re going through a healthy correction.

“The economy is growing. With the tax cuts, if those larger corporations start to pay bonuses or give raises to everybody for the next couple of years, it should boost growth.

“Smaller companies will benefit from it as well.”

Leverage

Pool said that he also liked the fact that the notes reflected a moderately bullish view on the market.

Investors in the notes can reach the cap level easily he said, thanks to the double exposure. The maximum return on an annualized compounded basis is 9.2%. It only takes a rise in the index of 4.7% a year to achieve the best outcome.

“You can hit the cap with a small return. A less-than-five percent increase in the index will result in a healthy rate of return.”

Six months note

Kirk Chisholm, wealth management and principal at Innovative Advisory Group, said investors were giving up too much potential return with the cap.

“If the market goes back to its recent highs, you’ll be really close to the cap,” he said.

“This is a good six-month note. On a short-time frame you can do well.

“But over two-years you’re giving up too much upside in my view.”

For investors who are skittish about the market or anticipate only moderate growth, “it’s great,” he said.

“The 10% buffer is fine. We’re not going to be down 10% in two years.

“But you’ll get capped out too soon. This is why I think it’s good for six months, not two years.”

The last leg

Chisholm said that he believes the current selloff is a “normal” and “healthy” correction. He remains bullish.

“The market will keep moving higher probably over the next two years.

“The economy is very strong.

“The index is likely to be going up more than 19.25%.

“We’ll be in the last leg of the bull market, which typically is the strongest.

“This note is fine for conservative investors. But I wouldn’t want to limit myself.”

HSBC Securities (USA) Inc. is the agent.

The notes will settle on Thursday.

The Cusip number is 40435FUA3.

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