CIBC’s $2.02 million leveraged notes on Stoxx offer defensive play, uncapped upside

By Emma Trincal

New York, Aug. 25 – Canadian Imperial Bank of Commerce’s $2.02 million of 0% market-linked securities – leveraged upside participation and fixed percentage buffered downside due Aug. 23, 2028 linked to the Euro Stoxx 50 index – provide an unusually strong protection level with unlimited leveraged upside, which may fit the needs of long-term, conservative investors seeking exposure to European markets.

If the index finishes positive, the payout at maturity will be par plus 161% of the index gain, according to a 424B2 filing with the Securities and Exchange Commission.

If the index finishes flat or falls up to 40%, the payout at maturity will be par. Otherwise, investors will be exposed to losses beyond 40%.

Jumbo buffer

“The 1.61 times leverage is good. The no-cap is great. But over five years, do I really need a 40% buffer?” said Steve Doucette, financial adviser at Proctor Financial.

“If you needed that 40% buffer in five years, the world would have to be pretty ugly.”

Doucette’s reasoning was that long-term holding periods do not require such high levels of protection since time will smooth out volatility.

“I would cut the buffer to 10% or 20% and see what type of leverage I could get in exchange.”

The downside protection, however, remained necessary given some of the persistent headwinds looming in the region.

A tale of two worlds

“Europe is not necessarily a safe place. You have to be concerned about the rise of socialism, slowing economic growth, inflation, energy dependency without mentioning fiscal issues,” he said.

Doucette has exposure to non-U.S. equity for diversification purposes. Although Europe is a requisite for the international bucket of a portfolio, he tends to lean toward the more volatile emerging market asset class.

“Shouldn’t you be looking at emerging markets rather than Europe? I tend to often ask myself how much I want to allocate to one versus the other.,” he said.

The Euro Stoxx has been underperforming “for a very long time,” he noted.

Since 2013, the Euro Stoxx 50 index has only outperformed the S&P 500 index twice and not by a wide margin, according to Morningstar. In 2017 and 2022 the euro zone benchmark beat the U.S. index by 2.7% and 3.4%, respectively.

Value vs. growth

“Investing in European stocks is betting on a reversion to the mean. Emerging markets offer a different story. The emergings are about growth, not turning the corner,” he said.

Emerging markets’ demographics, he noted, will fuel global economic growth by virtue of creating more demand for services and goods, he said.

However, emerging markets have also underperformed the U.S. pretty consistently over the past decade, he said, although on some occasions, they show stellar performance. In 2017 for instance, the MSCI Emerging Markets index surged 37% compared to 21.7% for the S&P 500 index.

“The hard part is to decide how much of your international portfolio you want to go to Europe versus emerging markets,” he said.

Upside potential

A financial adviser said he liked the risk-adjusted return profile of the security.

“The leverage is attractive,” he said.

“You don’t get the 3% dividend, but with that kind of multiple, the loss of dividend is not really an issue.”

Other terms were just as appealing.

“It’s an interesting product. Europe has underperformed for such a long period of time, to get that kind of protection and that kind of gearing is pretty nice especially with no cap on the upside.”

Because the European equity market has been lagging the U.S. for so long, investors in the notes would have to be slightly contrarian. But betting on a reversal to the mean made sense, he said.

“If we see an end of the Russian conflict, it would be a powerful catalyst. And you have reasonable valuations right from the start, which is also a positive,” he said.

Challenges, opportunities

But as the euro zone also has to face a number of challenges, investors may be reluctant to invest directly in the Euro Stoxx 50.

“You can get exposure to the euro zone indirectly if you own the S&P,” he said.

Approximately 30% of S&P 500 companies’ revenues come from foreign markets, he noted, citing data from S&P Dow Jones Indices.

“You own the S&P and 30% of your exposure is overseas. That way you’re already investing in Europe. Why then expose yourself to smaller countries in the Euro Stoxx?” he said.

For this adviser, some of the problems faced by European economies and markets are “insufficient innovation,” political risk and excessive government debt. Inflation was also a central issue.

For U.S. investors, currency exposure could be a risk if the U.S. dollar was to appreciate against the euro.

But as the dollar may have already peaked, such risk may turn to an opportunity should the dollar start to weaken against the euro.

“There are risks in Europe, but you do have a very large buffer. The uncapped leverage is fairly attractive, too.

“It looks like a decent trade if you want exposure to the region,” he said.

Wells Fargo Securities, LLC is the agent.

The notes settled on Aug. 23.

The Cusip number is 13607XLL9.

The fee is 3.87%.

© 2015 Prospect News.
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