JPMorgan’s $1.89 million leveraged notes on MSCI EAFE to fit slightly bearish, sideways view

By Emma Trincal

New York, July 28 – JPMorgan Chase Financial Co. LLC’s $1.89 million of 0% capped buffered enhanced participation equity notes due July 11, 2025 linked to the MSCI EAFE index offer an appropriate payout for a range-bound view on developed markets, advisers said. Investors will outperform if the market declines up to a point or rises moderately.

If the index finishes at or above its initial level, the payout at maturity will be par plus 200% of the index return, subject to a maximum settlement amount of par plus 28.08%, according to a 424B2 filing with the Securities and Exchange Commission.

If the index declines but finishes at or above its 82.5% buffer level, investors will receive par.

If the index falls by more than 17.5%, investors will lose 1.2121% for each 1% decline beyond the buffer.

Bearish tilt

“It’s kind of a decent structure. I don’t know if I would use it though,” said Steve Doucette, financial adviser at Proctor Financial.

“I can’t imagine that two years out the EAFE would be down 17% but who knows?”

The MSCI EAFE index offers exposure to companies in developed markets in Europe, Australia, Asia, and the Far East.

“With the buffer, you are going to automatically outperform on the downside. But on the upside, the outperformance is limited. Once you’re capped out, you’re capped out,” he said.

This was the main reason why this adviser would not consider the notes.

“I want to outperform both ways, not just one,” he said.

“You’re leaning toward a more bearish view with the larger buffer and capped leverage.”

The 28.08% cap is the equivalent of approximately 13% on an annualized compounded basis.

“Nobody is going to complain about 13% a year except if the market races much higher,” he said.

Europe weighting

The recent performance of the EAFE index has been bullish. But the trend is very recent.

“If you look at the chart, yes, the EAFE has outperformed the S&P last year. But you have to step back and take a look at a longer timeframe. And over the past five years, the S&P has strongly outperformed,” he said.

Investors considering exposure to the EAFE should know that European stocks represent about 61% of the index.

“You have to have a lot of confidence in this part of the world,” he said.

Doucette said he was bullish on European equity markets.

“Europe has lagged the U.S. for a long time. You may expect a possible reversion to the mean,” he said.

Against the cap

For bulls, the limited upside was a major drawdown.

“What I don’t like about this note is the cap. I don’t know that I’d take a large buffer like this one,” he said.

His main goal if he had to revisit the structure, would be to eliminate the upside cap.

“There are different ways to go about it,” he said.

“I could reduce the size of the buffer and reduce the leverage, maybe extend the duration.

“In general, I don’t want my upside to be limited when I buy a note on equity. It can cap you out and you might miss out.”

Digital play

JPMorgan priced another note on the same index and with the same maturity date but using a very different structure.

It was an issue of $2.59 million of 0% digital equity notes paying at maturity par plus 17.8% if the index finished at or above 85% of initial level. Otherwise, investors would lose 1.1765% for every 1% that the index declines beyond 15%.

“I look at it as a hedge. If you want to buy a hedge against equity, go ahead and do it,” he said.

The only way investors may outperform is if the index trades sideways, he said.

“This one is even more bearish than the first one. In fact, I see it almost like a bearish bet.

“I would take a pass.”

Recent high

Matt Medeiros, president and chief executive of the Institute for Wealth Management, said he liked the leverage in the first offering.

“This note is pricing at a recent high for the EAFE index, but the EAFE has been historically low for quite a number of years,” he said.

The index last week hit its highest point since March. It has increased by more than a third since its one-year low in October.

“I see some opportunities in this asset class. But you need to pay attention to the recent performance.

“A lot of this growth has already been priced in, which makes the leverage very attractive,” he said.

But the downside risk should also be a concern.

“The buffer is a bit too small in my view. Given the recent runup, it’s not hard to imagine that the index could drop 17% or more in a two-year period,” he said.

In the zone

The second deal, which rewards investors if the index declines within the buffer zone, expressed a non-directional approach.

“I like the digital component. We’re in a market cycle where structured notes make a lot of sense if you have the right structures that align with your view on the market,” he said.

“My concern with the leveraged note is growth. This second offering makes more sense if you have a range-bound view on the EAFE.”

The digital structure with a threshold set 15% below initial level was more attractive than a typical absolute return payout.

“It’s better because you get the 18% automatically as long as you’re in the -15% to +18% range. It’s a booster. You don’t depend on the index performance. It’s a matter of staying in the range. As long as it doesn’t fall by more than 15%, you’ll get paid,” he said.

“You can significantly outperform the underlier.

“I like the note.”

JPMorgan Chase & Co. is the guarantor and J.P. Morgan Securities LLC is the agent for both offerings.

The leveraged notes (Cusip: 48133YHC1) settled on Thursday.

The digital deal (Cusip: 48133YHB3) settled on July 25.

The fee on both notes is 0%.

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