JPMorgan’s uncapped gears tied to Euro Stoxx 50 seen as attractive, but five years is tough call

By Emma Trincal

New York, March 13 – JPMorgan Chase Financial Co. LLC’s 0% trigger gears due April 29, 2022 linked to the Euro Stoxx 50 index offer two attractive features – unlimited upside and leverage – but making a market call five years from now can be challenging, financial advisers said.

The payout at maturity will be par plus 2.1 times to 2.2 times any index gain, with the exact participation rate to be set at pricing, according to an FWP filing with the Securities and Exchange Commission.

Investors will receive par if the index falls by up to 30% and will be fully exposed to any losses if the index finishes below the 70% downside threshold.

Value play

The underlying benchmark tracks the performance of the euro zone equity markets.

Advisers said they are bullish on this market.

“The reversion to the mean is starting to work,” said Steve Doucette, financial adviser at Proctor Financial.

Doucette has long predicted that the lagging performance of the Euro Stoxx versus the S&P 500 index, would at some point be reversed.

The Euro Stoxx 50 index is now outperforming the S&P 500 this year, up 6.30% versus 4.45% for the U.S. benchmark, he noted.

“So far, Europe has been left behind in a big way,” he added.

Over the past year, the S&P 500 index has returned nearly twice more than its European counterpart, up 12.30% against 6.35%, respectively.

In the last five-year period, the U.S. index surged 71% amid a bull market now in its eighth year while the Euro Stoxx only showed a 21% return.

Matt Medeiros, president and chief executive of the Institute for Wealth Management, was also comfortable with European equities.

“I like the Euro Stoxx 50 because of the runup in the S&P. International has attractive valuations at this point,” this adviser said.

Timing the market

The five-year tenor was Doucette’s main source of hesitation.

“It seems to be a pretty straightforward note. But duration may be an issue,” he said.

“I guess it depends on your prediction. The risk is we continue to be up for a few years and then have a pullback without enough time to recoup.”

Doucette was slightly more optimistic short term.

“I think we’re still getting some momentum in this market. It may continue for a while.

“I tend to think that the leverage will be more beneficial in the next year or two.

“But who knows? These notes give you a defined outcome. What’s not defined is timing. We pretty much know we’re going to have a bear market. But when? This thing is timing the market.”

The five-year term could be positive if the market had enough time to recover after a downturn, he said.

“I would have to do more research but I bet you have a better probability of doing well in the next couple of years or so,” he said.

Shorter alternative

Another advantage of a shorter duration was liquidity.

“With a five year the question becomes: am I going to be able to get out of this note and at what price?” he said.

In his practice, Doucette routinely sells his structured notes on the secondary market.

Given the downside risk, the 30% contingent protection may not be enough.

“It’s a nice plain-vanilla note. But you really have to decide how important the leverage is versus the barrier,” he said.

“We just did a new note and we pushed 40% for a two-year.”

If he had to reconfigure the JPMorgan product, Doucette said he may want to shorten the tenor and add more protection in exchange for less leverage.

Good points

Medeiros did not object to the duration. His concern was the barrier level.

“I don’t mind five years. Generally you try to hold on to something like this through the business cycles,” he said.

“I also like the leverage. It enhances your return and you have no cap.

“But I’m not a big fan of barriers. Even though the Euro Stoxx hasn’t performed like the S&P, it’s probably more volatile. That’s why I would be more concerned of piercing that barrier even if it’s a point to point.”

Barrier versus buffer

The structure would be more attractive if the barrier was replaced by a buffer.

“I imagine you can manage to get a buffer of 30% over five years. I’m not sure what the tradeoff would have to be though.

If forced to choose between the absence of a cap and a buffer, he said he would probably agree to a cap.

“But it would have to be an advantageous cap.”

Political risk

As the French elections draw near, fueling volatility in the European market on the view that another “Brexit” may happen as the result of the potential election of one of the two anti-European and populist candidates, Medeiros said his five year outlook remains bullish.

“Despite all the predictions of a pop in Europe as a consequence of political unrest, so far it hasn’t happened yet,” he said.

“I still think that the Euro Stoxx offers great value compared to the U.S. market.”

UBS Financial Services Inc. and J.P. Morgan Securities LLC are the agents.

The notes are guaranteed by JPMorgan Chase & Co.

The notes will price on April 26 and settle on April 28. The Cusip number is 48129F473.

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