Max Darer, Lowes Financial Management, 24/04/2024  

Walker Crips have recently released a duo of capital at risk autocalls linked to the Nikkei 225. These mark the first plans to be linked to the Japanese blue chip index in the UK retail sector since 2015 which were FOCUS plans linked to the Nikkei and Euro Stoxx 50. We have to go back to 2007 to see a structured product linked solely to the Nikkei 225 where Abbey Capital had a range of Guaranteed Japanese Equity Bonds. These provided capped upside returns but did not subject investors to risk of loss through their deposit-based structure however, none of these provided a gain at maturity.

The latest Nikkei linked autocalls come in the form of a 6-year at-the-money, offering 10.75% for each year held and a step-down contract requiring the index to be above 85% of the strike level after 6 years in return for 9% p.a. Both plans have 50% end of term barriers and have Morgan Stanley & Co. International as counterparty.

We are acutely aware that the Nikkei has shown significant growth of late and acknowledge that this could continue. Equally, we know this to be one of the more volatile indices and whilst the deep protection barrier of 50% observed only at the end of the maximum term, and then only if the plan hasn’t matured sooner, will afford some comfort, we feel that the additional potential coupon offered over a FTSE only contract may not be sufficient to attract investors.

Looking at historical backtesting since 1965 on the Nikkei for the latest step-down contract we can see the total number of maturity outcomes that would have occurred historically from the more than 14,000 possible start dates.

 

Year

No. of kickouts

%

Opportunity 1

2

9,788

69.86%

Opportunity 2

3

1,082

7.72%

Opportunity 3

4

527

3.76%

Opportunity 4

5

434

3.10%

Opportunity 5

6

350

2.50%

Returned capital only

1,490

10.64%

Returned loss

329

2.35%

Yet to kick out, post 1st opportunity

10

0.07%

Total

  

14,010

100%

 

Source StructuredProductReview.com, Yahoo Finance

The structure would have disappointed for almost 13% of all possible observations (these theoretical strike dates shown as blue and red above) albeit with only 2.35% (red) resulting in a capital loss, which by definition would have been at least 50%.  Whilst the remaining 86.95% of the time a positive return would have arisen, with the index at its current high the question remains, is a 9% coupon on this contract enough of an uplift from a standard FTSE only autocall for the increased risk that a positive return may not result?

 

 

Structured investments put capital at risk.

Past performance is not indicative of future results.