RBC’s $12.21 million Trigger PLUS on Topix show attractive terms, but entry price is high

By Emma Trincal

New York, March 7 – Royal Bank of Canada’s $12.21 million of 0% Trigger PLUS due March 3, 2027 linked to the Topix index offer investors an attractive structure. But the bet on the underlying, which has outperformed the S&P 500 index, gave pause to advisers as they questioned the timing of the trade.

If the index return is positive, the payout at maturity will be par plus 196% of the index return. Investors will receive par if the index return is negative but ends at or above the 80% trigger and will lose 1% for every 1% decline if it ends below the trigger level, according to a 424B2 filing with the Securities and Exchange Commission.

Single country

“I like the structure, but I would have to look at the index,” said Steve Doucette, financial adviser at Proctor Financial.

“They’ve hit new highs. We hear a lot of Japan lately. I would need to do some research.”

One stumbling block was the focus on a single country.

“When we buy international, we prefer to use broadly diversified funds. We have mutual funds where we let the portfolio manager do the allocations. We also use ETFs,” he said.

One way to combine a diversified portfolio of foreign indexes with a large exposure to Japan was through the MSCI EAFE index, he added.

This index tracks the equity performance of developed markets. Japan is the largest country with a 24% weighting.

“We do have both. Actively managed funds in Asia and the EAFE ETF,” he said.

Historical break

The recent performance of the Japanese equity market while newsworthy could also be cause for concern, he noted.

Japanese equity benchmark Nikkei 225 recently rose above its 1989 high, putting an end to nearly 35 years of lackluster returns, coined as “lost decades” after the Japanese stock market bubble burst in 1990.

This year, the Topix index has outperformed the U.S. nearly two-fold, climbing 15.6% compared to 8.1% for the S&P 500 index. The Topix also beat the U.S. index in the past year surging 39% versus 32% for the S&P 500 index.

In November, economists at Golman Sachs predicted a bull market for the Topix in 2024 along with a strong economy. The stock market rally was partly due to improved rules in corporate governance imposed by the Tokyo Stock Exchange which the analysts described as “a game changer” for the Japanese equities market.

Capital inflows

A senior market analyst at another firm pointed to Japan’s changes in its monetary policy and to geopolitical developments as main contributors to the rally.

“There’s been a monumental policy shift in Japan since the Bank of Japan has decided to raise interest rates,” this senior market analyst said.

The Central Bank increased interest rates last summer for the first time since 2007.

“The transition from its monetary easing policy is attracting foreign investments especially as the Bank of Japan is committed to a slow hiking cycle, one that’s not going to cripple the economy,” he said.

As the S&P 500 index has become toppish, investors have been looking for alternatives or at least a place to hedge their U.S. exposure, he added.

Geopolitics also played a role in the recent rally.

“Our relations with China in this Election year are not going to improve. Japan is already seen as the beneficiary of those geopolitical tensions,” he said.

In the headlines

Doucette said that recent headlines celebrating the Japanese bull market would not be a good reason for him to invest.

“There’s a lot of noise around Japan and I haven’t done my due diligence on it. For sure, Japanese stocks are through the roof, but it’s not really clear why,” he said.

“It’s always a little bit concerning to jump into a note at an all-time high. Is it really a reversal story or is it a temporary momentum for traders?

“I’d like to wait and see if we’re really moving into a new paradigm.”

Strong rally

Matt Medeiros, president and chief executive of the Institute for Wealth Management, said the Japanese bull market was hard to ignore.

“I’m not too familiar with Japanese markets. But if you just look at a chart, the Topix is on a tear, especially since the beginning of last year,” he said.

“I like the fact that there is growth there and that it’s outperforming the S&P. It’s nice that we’re starting to see some breakout indices outside of the U.S.”

Leverage, barrier

Medeiros said the structure of the notes was compelling.

“Not only do you get the leverage but there is no cap,” he said.

The three-year term was a “good call,” and the 80% barrier offered “some level of security,” he added.

The only caveat was valuation.

“You’re pricing it today at a multi-year high. That’s something you have to pay attention to.

“That says, it reflects optimism around this country,” he said.

The simplicity of the structure was also attractive for both advisers and investors.

“What frustrates me with some notes is when you have five moving parts to follow in a worst-of. This one is straightforward,” he said.

The notes offered investors a tool to “speculate” on the Japanese rally with the safety net of a barrier.

“You can participate in a foreign index with the downside protection.”

He saw in the leverage a means to generate growth but also reduce risk.

“Because it has the leverage, you can allocate less than what you would usually do for this asset class.

“I like the note,” he said.

RBC Capital Markets, LLC is the agent. Morgan Stanley Wealth Management will act as placement agent.

The notes settled on Tuesday.

The Cusip number is 78017FG64.

The fee is 3%.

© 2015 Prospect News.
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