UBS’ $100,000 phoenix autocallables on iShares MSCI Brazil seen as bet on economic recovery

By Emma Trincal

New York, Dec. 8 – UBS AG, London Branch’s $100,000 of trigger phoenix autocallable optimization securities due Dec. 10, 2021 linked to the iShares MSCI Brazil ETF come at the right time as a return to global economic growth could be bullish for both commodities and emerging markets, buysiders said.

If the ETF closes at or above the trigger price – 75% of the initial share price – on a quarterly observation date, the issuer will pay a contingent coupon for that quarter at the rate of 12.67%. Otherwise, no coupon will be paid that quarter, according to a 424B2 filing with the Securities and Exchange Commission.

If the shares close at or above the initial price on a quarterly observation date, the notes will be called at par plus the contingent coupon.

If the notes are not called and the shares finish at or above the trigger price, the payout at maturity will be par plus the contingent coupon. Otherwise, investors will be exposed to the share price decline from the initial price.

No early call

Steven Jon Kaplan, founder and portfolio manager of True Contrarian Investments, said the notes may benefit from the next U.S. dollar trading cycle.

“I don’t think you’ll get called in three months,” he said.

Emerging markets such as Brazil see their performance inversely correlated to the value of the U.S. dollar, he said.

“Brazil is a big commodities exporter. Their stock market loves high commodities prices, economic growth, higher inflation and higher rates.”

This usually comes with a weaker dollar.

The U.S. dollar index hit a 52-week low last week, he noted. Since its high in March, it has declined by more than 12%.

This bearish trend would benefit Brazil if it continued. But Kaplan expects a reversal in the next few months albeit a short-lived one, which explains why he does not expect an early call.

Inflation scenario

“Short term, the dollar is going to rise. So that won’t be good for Brazil. This ETF thrives when the dollar weakens,” he said.

“However, at some point next year, the dollar will go down again...just not right away.”

His analysis was based on the strong conviction that inflation is creeping back up.

“With more stimulus, more debt issuance, interest rates will go up and inflation will go up. I think the dollar will begin to decline again around March or April 2021.”

From that point until the end of next year, Kaplan is confident that the notes will either get called or mature without investors incurring losses.

Good timing

He explained how he predicted the direction and length associated with the way the U.S. dollar will trade in the upcoming year.

“I studied past trends and I observed that when the dollar moves higher, it moves higher quickly. On the other hand, when it moves lower, the trend tends to be slower,” he said.

“That’s why I think the timing for these notes is reasonably good.

“Because it’s going to take some time for the dollar to drop, your chances of getting called right away are limited. You may miss one or two calls while still getting paid. It might work out better for you.”

Once the weaker dollar/higher inflation trend is established, investors should not be overly concerned about the downside risk, he said.

“I think this 25% protection should be sufficient. By the end of 2021, we’ll already begin to see higher rates, higher inflation and a spike in commodities prices. All those factors are positive for commodities-exporters like Brazil.”

Vaccine boost

Tom Balcom, founder of 1650 Wealth Management, was also bullish on the ETF on the view that a global economic recovery should lift most markets next year.

“Petroleo Brasileiro is one of the top names. Like most oil companies, like Exxon here, they’ve experienced a decline in revenues due to air travel restrictions as a result of Covid,” he said.

“But with a vaccine around the corner, oil stocks, commodities stocks are going to recover. It’s a positive for the notes and for emerging markets.”

Barrier, yield

Balcom said the structure was also relatively attractive.

“Twenty five percent for one year is a heathy barrier especially if you believe the vaccine will jump start the global economy in the foreseeable future,” he said.

“With a 10-year Treasury yielding 0.9%, getting a 13% coupon is also very compelling. Of course, there is risk. But you have this 25% barrier.”

Balcom said he also liked the fact that the note was not a worst-of.

“It’s nice to see something linked to a single underlier,” he said.

“I wouldn’t use it as fixed-income replacement though since you have equity risk. But it would work out fine as an equity substitute.”

UBS Financial Services Inc. and UBS Investment Bank are the underwriters.

The notes priced on Monday and will settle on Wednesday.

The Cusip number is 90282L657.

The fee is 1%.

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