China, Brazil Stock Rally May Offer 42% Return on Merchant Capital Notes

Merchant Capital Ltd., a London- based distributor of structured products, is marketing three- year securities to U.K. investors that pay as much as 42 percent on gains in Chinese and Brazilian stocks.

The so-called autocallable notes are tied to the Hang Seng China Enterprises Index and the iShares MSCI Brazil Index fund, according to Thom Gascoigne, head of structured products at Merchant Capital. The notes are automatically redeemed at half- yearly call dates if the indexes climb at least 5 percent above their initial value. Otherwise, the notes accrue 7 percent every six months until the redemption level is reached, for a total 42 percent if the target is met in the final call period.

Investors get back their money as long as both indexes don’t fall more than 50 percent after three years. Below that point, holders incur losses equal to the percentage decline of the index that performs worse.

“Brazil and China are core holdings for any emerging markets portfolio and we remain positive on both in the medium term,” said Philip Poole, London-based global head of macro and investment strategy at HSBC Global Asset Management, which oversees more than $400 billion. “But if you want equities exposure you should buy equities,” said Poole.

The Hang Seng China Enterprises Index of Chinese companies listed in Hong Kong has dropped 7.9 percent this year, while the iShares MSCI Brazil Index has fallen 6.8 percent.

Merchant Capital’s notes charge a maximum 6 percent fee, which includes management and broker costs.

To contact the reporter on this story: Sarfraz Thind in London at Sthind3@bloomberg.net

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