Barclays’ buffered SuperTrack notes tied to Euro Stoxx 50 offer contrarian play with upside

By Emma Trincal

New York, Oct. 20 – Barclays Bank plc’s 0% buffered SuperTrack notes due Oct. 24, 2019 linked to the Euro Stoxx 50 index offer a high enough cap to attract bullish investors, making the product a good vehicle for a contrarian bet, financial advisers said.

The payout at maturity will be par plus double any index gain, up to a maximum return of 60.25%, according to a 424B2 filed with the Securities and Exchange Commission.

Investors will receive par if the index falls by up to 10% and will lose 1% for each 1% decline beyond 10%.

Laggard

Steve Doucette, financial adviser at Proctor Financial said he liked the structure because the cap allows investors to capture the upside of an undervalued index. The Euro Stoxx 50 has lagged the performance of the U.S. equity large-cap market since 2013.

“The Euro Stoxx has the potential to rebound. There is a huge gap between the two,” he said, adding that the spread between the Euro Stoxx and the S&P is more than 40 points since 2013.

There have been only two years – 2009 and 2012 – since the financial crisis of 2008, in which the performance of the Euro Stoxx 50 has been better.

Contrarian

This year so far, the euro zone index has dropped 5% while the S&P 500 index has gained 4.75%.

Such results may encourage value or contrarian investors.

“If you view the Euro Stoxx as not as bad as everybody is saying, you get a great cap,” he said.

The cap on the notes is 17% on an annualized compounded basis.

“Much of the market has been up. Europe is behind,” he said. “This is a neat scenario for a contrarian approach.

“Sell the winners and buy some of the worst-performing asset classes.”

Buffer

On the downside, the 10% buffer provided some relief if the market turned negative.

“You’re going to outperform on the downside. Would the index repeat 2008? Hopefully not, but if it does, you’re going to make some of that up with the 10% buffer,” he said.

In 2008 the fall of Lehman Brothers pushed the U.S. and European benchmarks well into bear market territory with the S&P 500 index down 37% while the Euro Stoxx 50 index plunged 45%.

If Doucette decided to invest in the notes, he would renegotiate the downside protection.

“A 10% buffer is good. But I would back up the leverage a little bit and increase the buffer,” he said.

Credit exposure

The credit risk was also a consideration, or at least a parameter, to take into account when evaluating the terms.

“Anytime you go three or five years out you have to think about credit risk. If you don’t like Barclays’ credit, you could go back to the American banks and again give up some of the leverage,” he said.

The British issuer offers credit default swap spreads of 101 basis points, which is wider than its counterpart HSBC at 75 bps, according to Markit. Most French banks show tighter spreads as well, ranging between the high 60’s and 70 bps. U.S. banks have narrow spreads as well in comparison. JPMorgan for instance shows 60 bps; Bank of America and Citigroup, 77 bps; and Morgan Stanley, 86 bps, according to Markit.

“Banks have the obligation to pay you. But are they going to be there to pay you?”

Value play

Matt Medeiros, president and chief executive officer of the Institute for Wealth Management, said he liked the underlying investment theme as well as the upside potential of the notes.

“I think it’s a good idea to have structured notes around asset classes that have historically high standard deviation but that are trading at fair valuation,” he said.

“This particular asset class is appealing right now from a value standpoint. But one could easily argue that Europe is facing some headwinds.

“So having a generous cap with some downside protection makes a note like this very appealing.

“When you invest in a higher-risk asset class, there needs to be an incentive for a reward.

“This cap seems to be in line with the risk you’re taking.”

Some of the current volatility seen on the Euro Stoxx 50 index reflected the market’s current focus on Brexit, he noted.

Finally Medeiros said he was comfortable with the maturity of the product.

“Three years is reasonable, for sure.”

Barclays is the agent.

The notes will price on Friday and settle on Wednesday.

The Cusip number is 06741VD90.

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