Credit Suisse’s buffered PLUS on Xtrackers Harvest CSI 300 China A-Shares too short a trade

By Emma Trincal

New York, April 23 – Credit Suisse AG, London Branch’s 0% buffered Performance Leveraged Upside Securities due May 4, 2023 linked to the Xtrackers Harvest CSI 300 China A-Shares ETF offer reasonable terms, but the timing is not the best, said a contrarian portfolio manager.

If the ETF return is positive, the payout at maturity will be par plus two times the ETF return, subject to a cap of par plus 21%, according to a 424B2 filing with the Securities and Exchange Commission.

If the index finishes flat or falls by up to 10%, investors will receive par. Otherwise, investors will lose 1% for every 1% index decline beyond 10%.

A-shares market

“At least they give you a generous cap,” said Steven Jon Kaplan, founder of True Contrarian Investments.

“But I don’t like the two-year term. It’s neither short enough nor long enough. I’d rather have a one-year or even a five-year. But two years is the average length of a bear market and you’re getting in at just the wrong time when the market is overpriced.

“Since the timing is not good, the high cap may not even be of any help.”

The underlying fund replicates the CSI 300 index, which represents the 300 largest and most liquid stocks in the China A-share market. A-shares are the stocks of mainland China companies trading on the Shanghai Stock Exchange and the Shenzhen Stock Exchange.

Governance

A risk involved for investors getting exposure to China A-shares as opposed to stocks trading on the Hong Kong Stock Exchange is a mix of regulatory scrutiny and lack of transparency, he said.

The government may impose restrictions on some companies, as seen recently with Jack Ma, founder of giant e-commerce company Alibaba Group Holdings Ltd. as it forced the billionaire to divest its media assets.

“The authorities did not like to have a wealthy industrialist criticize the government. When you do, they’ll put you under all kinds of pressure,” he said.

Another concern for investors is the reliability of economic data and companies’ earnings announcements.

“You’re always sort of wondering whether you’re not getting some kind of inflated measures of profitability,” he said.

For a savvy investor, this perceived manipulation may create an arbitrage opportunity.

“If it’s hard to avoid regulatory risks in China, at least it’s under your control not to buy a market that trades at a high point,” he said.

Not cheap

The fund’s share price, which in the Friday midafternoon session was trading at $39.75 is approximately 15% off its most recent peak in February. But it remains close to two-thirds higher than its low recorded during the coronavirus-induced global bear market of March 2020.

“The current P/E is 16.82. It’s not as high as the U.S. markets, but still high. I was buying the ETF in the beginning of 2019 when the P/E was at 8.5. It has doubled since then,” he said.

“I would certainly not buy it today.”

Short cycles

One characteristic of the Chinese market making the two-year tenor riskier is its short-cycling pattern.

“There are twice as many tops and bottoms in the Chinese stock market than in the U.S. Bear markets tend to be half as long as they are here. Part of the reason is because the government doesn’t interfere as much as in the United States to stimulate the economy,” he said.

“In America, government intervention is what makes the market go up for longer periods of time. The Fed’s accommodative policy for more than a decade has pushed valuations higher and higher to a point where there is a lot of room for the market to go down.

“So, while we have fewer bear markets, they tend to be brutal.”

The burst of the dot.com bubble offered an example. After topping in March 2000, the Nasdaq finished more than 80% lower in the fall of 2002.

Before 1913

More recently the S&P 500 index dropped 35% from Feb. 19 to March 23 of last year. It was the shortest bear market in U.S. history. The Xtrackers Harvest CSI 300 China A-Shares ETF did not fall that much at the time. It dropped 20% during an even shorter bear market, which lasted a couple of weeks.

“The Chinese market dropped considerably less, partly because it was less overpriced than the U.S.,” he said.

He compared the Chinese market to the United States prior to the creation of the Federal Reserve in 1913.

“In the 1800’s you had more frequent downturns. Recessions did not last that long. Total percentages of losses were not as severe compared to after the Fed was created. It was similar to what the Chinese market is today,” he said.

“Bear markets in China are more frequent but not as severe. You get buying opportunities more often.”

Buying A-shares at the end of 2018 or the beginning of 2019 was a much better play, he noted. At the time, the index was twice as cheap.

Short-term outlook

“This note would not work for me because within the next two years, there’s not a chance you can avoid a bear market in China. We should have one in the United States which can drag down the whole world,” he said.

“This particular index is volatile, and you could easily lose 40%. The 10% buffer is not nearly enough to give you protection.

“It’s possible that the A-shares market could bottom within two years. But you don’t have enough time to recover.”

“Timing is very important. A lot of people underrate the starting point of a trade.”

Morgan Stanley & Co. LLC is the agent.

The notes will price on April 30 and settle on May 5.

The Cusip number is 22551F798.

The fee is 3%.

© 2015 Prospect News.
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