Credit Suisse’s contingent coupon autocalls on gold ETF show right timing in bear market

By Emma Trincal

New York, June 19 – Credit Suisse AG, London Branch’s contingent coupon autocallable yield notes due Oct. 4, 2021 linked to the VanEck Vectors Gold Miners ETF appear to come at the right time as a bear market has just begun, said Steven Jon Kaplan, founder and portfolio manager of True Contrarian Investments LLC.

The tenor of the notes is short enough to reduce the risk of panic-selling, which tends to occur in the final stages of a bear cycle, he added.

If the fund shares close at or above the coupon barrier level, 70% of the initial share price, on a quarterly observation date, the notes will pay a contingent payment for that quarter at a rate of 14% per year, according to an FWP filing with the Securities and Exchange Commission.

The notes will be called at par plus the contingent coupon if the ETF closes at or above its initial price on any quarterly trigger observation date.

If the notes are not called, the payout at maturity will be par unless the share price finishes below its 70% knock-in level, in which case investors will lose 1% for each 1% decline of the ETF.

Safe haven

“This is a fund that’s been around for a long time. It tracks the performance of large gold mining companies, the biggest ones being Newmont Corp. and Barrick Gold Corp.,” said Kaplan.

“It’s been historically one of the better sectors in a market pullback. It tends to perform very well until the very final months of a bear market.”

Small-cap bear market

For Kaplan, the U.S. is already in a bear market. But the timing of the note with its 15-month tenor reduces the market risk at maturity as he does not expect the current bear cycle to end at that time.

“We’ve been in a bear market starting in August 2018 for small-cap. That’s when the Russell 2000 peaked. Since then, it has made lower highs but never fully recovered,” he said.

The small-cap benchmark today is still 18.6% lower than its all-time high of 1,742 of Aug. 31, 2018.

Young bear

“If you look at large-cap, the bear market really is much younger. It only started in February of this year.”

The S&P 500 index hit an all-time high on Feb. 19 at 3,393. It then plummeted to hit bottom on March 23 at 2,292. It was a loss of a third of its price in a little bit more than a month.

Since then, the benchmark has recouped more than 41% of its value. But it remains negative for the year.

“I think this note is fine because through October 2021, you’re probably going to be OK. The real danger is at the very end of a bear market. That’s when panic hits. Everybody sells everything. I don’t see that happening within the next 15 months,” he said.

Slow pain

In fact, Kaplan believes that for large-cap stocks, we are at the beginning of what he anticipates will be a “very long” bear cycle.

“The longer the bull market that precedes, the longer the bear cycle that follows. This has been proven repeatedly in the past.”

For small caps, the bear market is only 21 months old.

“For large cap, we only hit the all-time highs in February. So, we have a long way to go,” he said.

The fact that the market strongly rallied since March does not mean the bear market is over.

“Far from it. We had a very similar pattern in 1929. The market peaked in August then you had the big crash in September, very similar to 2020. The market recovered but then went much lower. It only ended in July 8, 1932.”

“It’s been only four months since we had the crash. I really don’t see how the end could happen 15 months from now. It will take much longer,” he said.

Market risk

Kaplan is not concerned about the underlying barrier because gold and gold stocks tend to do well as a hedge when volatility is high.

“Even if prices go down, in fact as prices go down, gold should do well. It’s an asset class people use to hedge. It’s considered a safe haven.

“This fund has plenty of time between now and October next year to go higher.

“The only concern is when you reach the climax of a bear market and that’s at the end.

“When a bear market ends, everything goes down at the same time.

“That’s the risk when buying the notes.”

But such risk is limited by the autocallable feature, the 70% barrier and the likelihood that the notes will mature before the end of the bear market.

Long bull, long bear

“I don’t think the U.S. bear market will end in October 2021,” he said.

He gave some historical examples.

The 1929-32 bear market was a 34-month cycle.

The dot.com bust between March 2000 and October 2002 lasted 31 months.

“The S&P and the Dow peaked in February. I think the end of this bear market should probably be more around the end of 2022,” he said.

Autocallable

In the meantime, the notes are much more likely to be called than not.

“It’s not necessarily a negative. If you get called in three months, you get your money back plus 3.5%.”

“Of course, if you’re bullish, you can buy the ETF straight out.

“But this gives you a certain and known return with a 30% protection, which is a good way to play gold if you’re a little bit cautious,” he said.

So far this year, the VanEck Vectors Gold Miners ETF has increased by 17% while the S&P 500 is down nearly 5%.

“The ETF is close to a lower end of a high. But it remains somewhat undervalued historically,” he said.

“I think the timing is right for this note.”

The agent is Credit Suisse Securities (USA) LLC.

The notes will price on June 30.

The Cusip number is 22552W7K5.

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