GS Finance’s $11.75 million trigger jump notes on Euro Stoxx 50 designed for sideways market

By Emma Trincal

New York, Jan. 11 – GS Finance Corp.’s $11.75 million of 0% trigger jump securities due July 8, 2025 linked to the Euro Stoxx 50 index should appeal to investors who do not expect wide price moves in this index, advisers said.

If the index return is zero or positive, the payout at maturity will be par plus 22.1%, according to a 424B2 filing with the Securities and Exchange Commission.

The payout will be par if the index declines by 10% or less. If the index declines by more than 10%, investors will lose 1% for each 1% decline from the initial level.

Sideways

“This note works only if you believe the Euro Stoxx is going to be range bound for the next 18 months,” said Steve Doucette, financial adviser at proctor Financial.

“If you’re right, getting 22% in 18 months is reasonable. It’s actually pretty good.”

The digital return over the period represents a 14% annualized compounded gain.

But Doucette said he would not use the notes.

“How do you know for sure what’s going to happen in 18 months?” he said.

European equity markets seemed “reasonably valued” compared to the United States, he added, which may give room for further growth.

“Even if 14% is a decent return, that’s your cap. You’re giving up everything above 14%,” he said.

Surprise to the upside

Forecasting the market over the short term was pointless, he added.

“Did I ever expect the U.S. market would outperform as it has at the end of 2023?

“Most analysts jumped into the recession bandwagon. Very few people expected the market to run up so much,” he said.

“And now, can we see a recession? Who knows?”

The main driver for the U.S. stock market performance remained the Federal Reserve’s rate decisions this year.

“If the Fed cuts rates it will obviously be bullish for the U.S. But it should also boost Europe. We are the world power. The ECB will follow suit if the Fed starts cutting. They’re never far behind.”

Barrier

Doucette said the terms of the notes were attractive but that he was not strongly convinced about the underlying investment view.

“If you believe Europe will be going sideways, it’s a neat little note.

“But I’m not going to cap my return even if the cap looks good,” he said.

The 90% barrier also gave him pause.

“I don’t think 10% is good enough on the downside. If it’s down more than 10%, you’re long the index.”

Investing in the notes required making a bet this adviser was not willing to make.

“I’m not ready to forecast a range-bound performance especially over 18 months,” he said.

More disqualifying was the limited ways by which the product could outperform the market, especially on the downside.

“When I position a note for my portfolio, I need it to outperform in any environment whether the market is up or down and not necessarily in a narrow range.

“This note only outperforms in a sideways market. It’s a view that’s too limited for me,” he said.

Valuation

Matt Medeiros, president and chief executive of the Institute for Wealth Management, said he liked the deal.

“That’s a really good note,” he said, adding that a 22% return over 18 months was attractive.

“Europe is an asset class that has underperformed the U.S. But that’s on a relative basis. If you look at it in terms of fair value, our return expectations for the Euro Stoxx are modest. We’re looking at single digits,” he said.

That’s because based on earnings projections, European stocks appeared to be “fairly to just a bit overvalued,” he said.

“Just because they’re lagging U.S. returns doesn’t mean they’re cheap.

“We don’t see a big potential upside.”

Buffer wanted

This view made the digital payout all the more attractive.

“If it’s only flat or positive, you get the 22%. That’s a very compelling payout,” he said.

But the downside protection did not fully meet his expectations.

“I would have been more comfortable with a buffer versus a barrier. A 10% hard buffer would have been much better, especially such a short tenor.

“It’s a good note. But I would rule out a 90% barrier especially on that timeframe,” he said.

The notes are guaranteed by Goldman Sachs Group, Inc.

Goldman Sachs & Co. is the agent with Morgan Stanley Wealth Management handling distribution.

The notes settled on Jan. 5.

The Cusip number is 40057XL94.

The fee is 2.5%.

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