HSBC’s buffered AMPS on VanEck gold ETF come at right time, contrarian portfolio manager says

By Emma Trincal

New York, Aug. 5 – HSBC USA Inc.’s 0% buffered accelerated market participation securities due Sept. 3, 2024 linked to the VanEck Vectors Gold Miners ETF should reward investors willing to get exposure to an unloved asset as the stocks are about to experience a severe bear market, predicted Steven Jon Kaplan, founder and portfolio manager of True Contrarian Investments.

If the fund return is positive, the payout at maturity will be par plus double the fund return, capped at par plus at least 40.3%, according to an FWP filing with the Securities and Exchange Commission.

The exact cap will be set at pricing.

Investors will receive par if the fund falls by 15% or less and will lose 1% for every 1% decline beyond the 15% buffer.

Entry point

Kaplan said the timing of the deal was appropriate based on the valuation gap between large-cap stocks and gold.

“GDX is well positioned to go up at this point. The fund is at its lowest since April 2020,” he said.

“GDX” is the ticker for the VanEck Vectors Gold Miners ETF, an equity fund that tracks the performance of companies involved in the gold mining industry.

Investors who had bought gold as a hedge against inflation at its recent peak almost four months ago have been punished with a nearly 40% decline, which helped make this ETF highly unpopular.

“We’ve been buying a lot of it in recent weeks,” he said.

Kaplan added that his bullish view on the ETF is based on market history.

“After large growth stocks reach a bubble high that pops, gold miners begin to climb and that happens only a few months later.

“This pattern has repeated itself many times with a high level of consistency,” he said.

And it is about to happen again, he noted.

At the peak

For Kaplan, the Nasdaq-100 index, and other large-cap U.S. growth funds are probably in a topping pattern.

Despite the equity rally seen since mid-June with a robust performance in July, this portfolio manager does not believe as many analysts do that the bear market is over.

The bear cycle started in November for tech stocks and in January for the S&P 500 index.

“What we’re seeing now is a typical bear rally,” he said.

Kaplan predicts a big percentage drop for the Nasdaq-100 index. He expects the bear market to last at least another two years.

Eight-month lag

“We know we’re in a topping pattern because U.S. growth stocks remain at record overvaluations compared to fair value,” he said.

“You had last year more inflows into stocks than in the past 20 years and not just in the U.S. but on a global scale. This crowding phenomenon is very similar to 1999. The same behavior was observed in 1972 and 1929.”

For “students of the market,” as Kaplan considered himself to be, a bursting bubble in growth stocks has positive implications for gold.

He noticed that a very consistent period of time – usually around eight months – has historically separated the burst of a stock bubble from the start of a gold bull market.

Three bears

For instance, the crash of March 2000 paved the way for an exceptionally strong bull market for gold, which began eight months later. From November 2000 to December 2003, the HUI Gold index (GDX did not exist then) rose seven times higher, he said.

“This pattern is pretty consistent. It was observed again in 1929. The famous stock crash happened the day after Labor Day. Gold began to rally eight and a half months later,” he said.

The same happened again during the 1973 bear market. Stocks reached a peak on Jan. 4 of that year and gold began to rally a little bit more than eight months later, in September, he noted.

“Three patterns in 100 years. It’s not a coincidence. Why is it happening? I’m not sure. I’m more interested to know how consistent the pattern is,” he said.

Flight to safety

For Kaplan, this pattern “is not just luck.”

“After a bubble bursts, investors begin to lose confidence in the overvalued, high-flying stocks everyone was buying not so long ago,” he said.

Those growth stocks have changed through the years, he noted.

In 1973, investors bought Polaroid, Xerox and IBM. More recently in 2000 it was Amazon, Yahoo, Cisco, he said, adding that the modern “darlings” today are the likes of Apple, Tesla, Microsoft and Nvdia among others.

“The names have changed but not the speculative euphoria pushing people to chase the same growth stocks at record highs. Once people lose money in a bear market, once confidence begins to fade, precious metals like gold and silver all of a sudden become extremely appealing,” he said.

Capped out

Commenting on the notes, Kaplan said that he liked both the underlying and the timing.

“Because it’s a relatively undervalued asset, you have a pretty good chance of finishing ahead. The 2x leverage is a big help too. A 40.3% cap is pretty good and it’s also probably the most likely outcome for this note.”

On an annualized compounded basis, the cap is 18.45%.

“Certainly, if we have a strong rally in gold, this level could limit your gains. But the tradeoff is the buffer and the upside leverage.”

The market risk on the downside was small in his view.

“If things turn against you, you have this 15% buffer. I think the chances you may need it are small because you’re already starting at a low point. But its’s always good to have a hard buffer,” he said.

Kaplan predicted that the underlying fund could easily rise between 20% and 30% at the end of the two-year term.

“I think you’re likely to get at least that kind of return. That’s why the chances of hitting the 40% cap are pretty high.”

Outperformer

“I don’t think there are too many assets where you’re going to have that type of gain. In fact, you’re more likely to lose 20% or more during those two years,” he said.

Kaplan said the current equity rally is only a pause. He expects stock prices to post deeper losses over the next two years and possibly until the beginning of 2025.

“It’s hard to say if the two-year term of the note is ideal. I may have preferred something slightly shorter since we’re coming off a bottom. But it’s not that important compared to the fact that you’re probably going to reach the cap,” he said.

“The timing and the pricing of this note are attractive, I think.”

HSBC Securities (USA) Inc. is the agent.

The notes will price on Aug. 26 and settle on Aug. 31.

The Cusip number is 40441XFN5.

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