HSBC’s autocalls with step-up premium on index, ETF show high premium, dispersion risk

By Emma Trincal

New York, Dec. 23 – HSBC USA Inc.’s 0% autocallable barrier notes with step-up premium due Dec. 23, 2024 linked to the lesser performing of the S&P 500 index and the VanEck Vectors Gold Miners ETF provide an attractive call premium with memory feature and step-up at maturity, making the structure appealing in a sideways market, an adviser said. But the exposure to the worst of two assets displaying a very weak correlation to one another may not be worth the risk, another noted.

The notes will be called at par plus an at least 15.3% annualized call premium if each underlying asset closes at or above its initial level on any semiannual observation date, according to an FWP filing with the Securities and Exchange Commission.

If the notes are not called, the payout will be par unless any underlying asset has finished below its 70% barrier level, in which case investors will lose 1% for each 1% decline of the least-performing underlying asset from its initial level.

Mildly bullish view

“I sort of like it,” said Jeff Pietsch, founder of Capital Advisors 360.

“Gold hasn’t done anything. The S&P 500 had a big run. While the gold miner ETF is the most volatile, the riskier of the two, it’s not impossible to see the S&P being the worst-of just by virtue of trading near record highs.”

The outlook for equity returns is low-single digits in the coming year, making the notes appropriate in a sideways market, he noted.

“If you don’t expect solid market gains, this note could nicely boost your return,” he said.

Snowball

Capturing the missed call premium at a later call date was also advantageous, he added.

“You have three years. You have to kind of ride it out. Both underlying have to be up at some point within the next three years,” he said.

Such outcome did not seem out of reach in his view.

“The economy is still solid. The fundamentals are still looking good for the next year or two. It’s an opportunity to get this snowball kicker.

“The 70% step up at the end is a big plus. In a rangebound market, this note is an opportunity for return enhancement,” he said.

Dispersion risk

Scott Cramer, president of Cramer & Rauchegger, Inc., objected to the choice of the gold miners fund in relation to the equity benchmark.

“I don’t like worst-of deals in general. I like it even less when you get the worst of two uncorrelated assets,” he said.

“If the S&P takes off, gold is not likely to do well and vice versa.

“This note would definitely not excite me. They just picked the wrong ETF in relation to the index. The chances of both performing well at the same time are slim.”

The three-year coefficient of correlation between the underliers is 0.375. In comparison, the two large-cap benchmarks – S&P 500 index and Dow Jones industrial average – display a 0.981 coefficient of correlation. A coefficient of 1 represents a perfect correlation.

“There’s a reason why they’re mixing those two in the worst-of. They’re not likely to move in synch. That’s how you’re getting a high premium,” he said.

Rolling the dice

The adviser also criticized the rationale behind the deal.

“Some deals, the view is very clear. You’re bullish on something, like the S&P or gold,” he said.

“But who is it for?”

One driving force for a potential buyer would be to make a speculative bet.

“Perhaps it’s for someone who thinks, ‘OK, I can get through a semi-annual period, perhaps even one year and get that 15% return.’ It’s for someone looking for income, but it has a price,” he said.

Cramer said that he was not optimistic about the gold miners ETF.

Trading at around $31 on Thursday, the share price was 22.5% off its 52-week high of May.

Dethroned gold

“Gold itself hasn’t done well. And yet, you would think that in the current macroeconomic environment, people would be buying gold to hedge against inflation,” he said.

“Well, it’s not happening.

“My personal view is that people are using crypto against inflation instead of gold.”

He did not validate the view. But he explained that in theory, one may understand the role of Bitcoin as a hedge since it was designed to be an independent currency.

“You could see it as an inflation hedge. I doubt that it’s used for that purpose however given that it’s such a roller coaster.”

The Bitcoin price, which was trading above $67,000 in the beginning of November, was trading just below $50,000 on Dec. 23, a more than 25% drop in less than two months.

“It’s hard to call it a reserve of value.”

“But regardless, my point is that gold hasn’t lived up to its reputation as an inflation hedge. So, I’m not particularly bullish on the ETF,” he said.

Perhaps the three-year tenor was the best item in the structure, but it was not enough to pique Cramer’s interest.

“I like the shorter deals. But give me something to work with,” he said.

HSBC Securities (USA) Inc. is the agent.

The notes were expected to price on Dec. 17 and settle on Dec. 22.

The Cusip number is 40439JUJ2.

The fee is 0.5%.

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