JPMorgan’s uncapped leveraged notes on Stoxx, EAFE ETF offer value, bullish play

By Emma Trincal

New York, May 31 – JPMorgan Chase Financial Co. LLC’s 0% uncapped accelerated barrier notes due June 4, 2026 linked to the lesser performing of the Euro Stoxx 50 index and iShares MSCI EAFE ETF give investors a chance to outperform via an aggressive upside payout and the exposure to undervalued assets in comparison with the U.S. equity market, buysiders said.

If the worst-performing asset gains, the payout at maturity will be par plus at least 235% of the return of the worst-performing asset, according to a 424B2 filing with the Securities and Exchange Commission.

The payout will be par if the worst-performing asset declines but finishes at or above its 70% barrier. Investors will lose 1% for every 1% that the worst-performing asset declines if it closes below its barrier.

“This is an interesting one. We tend to like longer notes so for us four years is not a problem. In fact, I’m a big fan of four-, five-... even six-year notes,” a financial adviser said.

“JPMorgan is a high-quality name. No issues here.”

Markets

This adviser’s preference was for the developed markets ETF.

“If you’re going to be in the international space, the EFA is the go-to for broad-based, international market, no-emerging markets,” he said.

He was referring to the ticker for the iShares MSCI EAFE ETF listed on the NYSE Arca under the ticker “EFA.”

“The Euro Stoxx is not my first choice because it’s only 50 stocks and more volatile.

“But it’s not bad, and at least those two have some degree of correlation, which helps with a worst-of.”

About 60% of the iShares MSCI EAFE ETF are European equities.

The cost of the offering was satisfactory.

“The 1% fee over four years is very competitive. That’s only 25 basis points a year. That’s probably why you’re getting those terms,” he said.

Reasonable risk

The downside was not as “exciting” as the upside, but this adviser said the barrier was probably “reasonable” based on back testing data compiled over the past 20 years on both underlying.

“Over four-year rolling periods, the EAFE has been down 30% or more only 1.3% of the time. With the Euro Stoxx, the probability rises to 6.8%.

“Of course, I’m not taking into account the risk of the worst-of.

“But the EFA is down 11% this year and the Euro Stoxx has lost more than 15%. So, you’re starting at a nice level.

“Am I totally confident about the downside? No. But overall, it’s pretty good,” he said.

Bullish play

The payoff with the leveraged return was “very compelling,” he said.

“The upside is huge. Not only do you have more than two times leverage, but it’s uncapped.

“This 2.35 times leverage is better than sliced bread especially if we have a rebound.

“You’re more than making up for the dividends. That’s one thing.

“And also, the index doesn’t have to go up that high. Even with low to high single digit returns, this deal gives you a lot of bang for your buck, especially given the fact that international markets have not performed as well as the U.S.,” he said.

The deal may be appropriate for a wide range of investors.

“If you’re a big bull, the uncapped is what you focus on. If you’re a moderate bull, you’re going to outperform with that leverage.

“It’s a compelling offering. I would certainly recommend it,” he said.

Value abroad

A portfolio manager emphasized the benefit of getting exposure to non-U.S. equities.

The iShares EAFE ETF covers developed markets at the exclusion of the U.S. and Canada.

“Four years is a good time. If we have a downturn – and we’re already having one since the beginning of January – you have a chance to recover,” he said.

“Europe and Japan are not as overpriced as the U.S. That’s another good reason to look at those markets.”

Japan is the top country is the EAFE ETF with a 21.94% weighting. It is followed by the U.K. with 15.74% and France with 11.44%. The next country is Switzerland with a 10.14% weighting.

“The Japanese yen is at a 20-year low. The British pound is weak too as well as the Swiss franc. These weaker currencies are a contributing factor in making those countries’ stock markets unpopular, which is not a bad thing if you want to find value,” he said.

The terms of the notes were also advantageous to investors.

“I would prefer a bigger barrier than 30% and perhaps less leverage. Maybe some people like leverage more. It’s a tradeoff,” he said.

“Having no cap is a great advantage. Getting the full upside is always best.

“The duration and the exposure to those markets is what makes this note appealing. You want to invest in markets that are not overvalued like the U.S.”

The notes are guaranteed by JPMorgan Chase & Co.

J.P. Morgan Securities LLC is the agent.

The notes were expected to price on May 31 and to settle on June 3.

The Cusip number is 48133FZM0.

The fee is 1%.

© 2015 Prospect News.
All content on this website is protected by copyright law in the U.S. and elsewhere. For the use of the person downloading only.
Redistribution and copying are prohibited by law without written permission in advance from Prospect News.
Redistribution or copying includes e-mailing, printing multiple copies or any other form of reproduction.