GS Finance’s PLUS on Euro Stoxx 50 designed for short-term, bullish bet on recovery

By Emma Trincal

New York, May 17 – GS Finance Corp.’s Performance Leveraged Upside Securities due Sept. 6, 2023 tied to the Euro Stoxx 50 index offer investors a bullish play on the European stock market, but the payout did not meet the expectations of a value investor and a bullish adviser.

If the index return is positive, the payout at maturity will be par of $10 plus 300% of the index return, subject to a maximum payment of par plus at least 28%, according to an FWP filing with the Securities and Exchange Commission. The exact maximum payment was to be set at pricing.

Investors will be exposed to any index decline.

Two different worlds

Andrew Schiff, investment consultant at Euro Pacific Capital Inc., said he invests in European stocks, but his picks are value-oriented with an emphasis on dividends. Without directly commenting on the structure of the notes, he said that the non-payment of dividends and the currency hedge associated with the notes would be deterrent factors.

He first compared the European market with the United States.

“There’s a pretty wide gap in performance between the Dow and the Euro Stoxx, especially since the beginning of the war in Ukraine in February,” he said.

“In that regard you may see the Euro Stoxx as a value proposition. The market may have the potential to come back, but I’m not sure that’s how it’s going to play out especially within such a short period of time.

“Europe for now is still dealing with a war that we’re not dealing with on this side of the Atlantic. That’s a big difference.”

Another difference was the Federal Reserve’s tightening policy in an effort to tame inflation.

“The Fed is hiking more aggressively than in Europe. Europe doesn’t have to face the prospects of a tighter monetary policy right now,” he said.

Dollar to weaken

Schiff said he was not sure how the notes would add value compared to an exchange-traded fund, such as the SPDR Euro Stoxx 50 ETF for instance.

One negative aspect of the note would be the “currency neutral” feature associated with most structured notes tied to foreign equity indexes. Notes tied to non-U.S. equity indexes have a so-called “quanto” option embedded in the structure, which removes exposure to currency risk. Long-only investors such as ETF shareholders typically don’t have such hedge. In that case, a stronger dollar brings negative net returns because the conversion of the assets from the local currency into U.S. dollars will buy fewer dollars. On the other hand, if the dollar weakens, U.S. shareholders benefit for the opposite reason – the conversion brings more dollars.

No such exposure to exchange rate exists with notes tied to a non-U.S. equity index.

Therefore, investors with a negative view on the dollar would rather not have the hedge, he explained, since they lose the benefit of a declining dollar.

“Right now, the dollar is strong because the Fed is raising rates and the economy is seen as robust, the labor market is tight. But we don’t think it’s going to last. For the better part of a decade, the economy has been dependent on low rates. The Fed now is going to have to raise rates significantly in order to fight inflation and you can’t do that without killing the economy.”

Hedging currency exposure when one expects a weaker dollar was therefore disadvantageous for noteholders, he said.

Yield, value

Schiff said he buys European stocks but focuses on value names with high dividends.

“We want the dividends,” he said.

The Euro Stoxx 50 index has a 3.2% dividend yield, which for the 16-month represents a 4.25% return, which noteholders are not entitled to earn.

“This is not our investment style. We buy value. We buy dividends. We buy inflation protection. We buy companies that deal with commodities and have pricing power,” he said.

“For the last decade growth dominated and value was abandoned. We’re going long deep value stocks. We assume we will have a recession.”

Schiff said he owns Spanish telecommunications company Telefonica SA, whose share price has gained 19% this year. The company pays a dividend yield of 8%.

The bullish case

Steven Foldes, wealth manager and founder of Evensky & Katz / Foldes Financial Wealth Management, said he is bullish on the Euro Stoxx 50 index based on current valuations and a possible catalyst for growth in the near future.

“We like the 3x leverage, we like the shorter duration, and we like the issuer’s credit, but I’m not sure we like the notes,” he said.

For starters, Foldes said he does not think the war in Ukraine is going to continue for another 16 months.

“There should be sufficient runway for some sort of resolution and peace by the time the notes mature. We do expect a significant bounce,” he said.

“Furthermore, the SPDR S&P Euro Stoxx ETF is already down 25% from its peak of a year ago.”

These two factors led this adviser to be comfortable with the downside.

“We are fine with the one-to-one downside. We don’t need the protection. We think it would be expensive and maybe unnecessary given the steep decline,” he said.

More upside needed

But Foldes said the cap was “a dealbreaker” as it was not in line with his expectations.

“You’re already getting in at a deep discount and the end of the Ukraine war could be a catalyst improving the index’s performance dramatically,” he said.

“What we would need is a higher cap or better yet no cap at all even if it means reducing the leverage factor.

“I don’t really concern myself with the pricing itself. I leave this to the bank. I’m more interested in finding notes that meet the needs of our clients.

“If I’m giving up a 3.2% dividend yield and if I take credit risk exposure, I want to get more upside.

“The cap is not high enough for us. If there is a surge, you’re not getting the full benefit of it at 28%.

“This note would do our clients a disservice.”

The notes are guaranteed by Goldman Sachs Group, Inc.

Goldman Sachs & Co. LLC is the underwriter.

The notes were expected to price on May 13 and to settle on May 18.

The Cusip number is 36263Q199.

© 2015 Prospect News.
All content on this website is protected by copyright law in the U.S. and elsewhere. For the use of the person downloading only.
Redistribution and copying are prohibited by law without written permission in advance from Prospect News.
Redistribution or copying includes e-mailing, printing multiple copies or any other form of reproduction.