Goldman Sachs sells $22.2 million leveraged notes tied to Topix amid Japanese stock rally

By Emma Trincal

New York, March 29 - Goldman Sachs Group, Inc. priced $22.2 million of leveraged notes linked to the Topix index following several similar offerings this month, which sources said suggests that investors have turned bullish on the Japanese equity market.

The Topix index, also known as the Tokyo Stock Price index, is a capitalization-weighted index of all the domestic common stocks listed on the First Section of the Tokyo Stock Exchange.

The 0% leveraged index-linked notes due July 1, 2010 have a payout at maturity of par plus double any index gain, up to the maximum settlement amount of $1,081.20 per $1,000 principal amount of notes, according to a 424B2 filing with the Securities and Exchange Commission.

Investors will share in any losses.

Goldman, Sachs & Co. and J.P. Morgan Securities Inc. were the agents.

Japanese theme

This offering comes on the heels of several others this month at a time when the Japanese stock market is on an upward trend, which investors in structured notes seem to be catching on to, sources said.

Earlier last week, Goldman Sachs priced $26.98 million of 0% leveraged index-linked notes due July 1, 2010 linked to the Topix index. It was the same structure except for the cap, which was set at 7.8%.

As with the recent offering, JPMorgan was co-agent for the deal.

On Wednesday, Barclays Bank plc priced $9.4 million of 0% return enhanced notes due July 1, 2010 linked to the Topix index also via JPMorgan. The structure and the maturity date were identical, but the cap in this offering was 9.06%.

Stock rally

"Japan is one of the better performing markets right now," said Brian Kelly, founder of Kanundrum Capital in Rowayton, Conn.

Since the middle of last month, the Topix has risen by 9.65%.

The Japanese index is up 5.6% this year, compared with 5.1% for the S&P 500 and 2.3% for the Stoxx Europe 600 index.

Kelly said that Japanese stock prices are rising now because of an export-induced recovery. At the origin of the boost in exports lies a depressed currency, he noted.

Weak yen, strong sales

"I like Japanese equities a lot," Kelly said. "Obviously, Japan is heavily exposed to China, and it helps. More specifically, I think the yen will weaken significantly this year because Japan is fighting deflation. They want a weaker yen that will strengthen exports," he said.

Kelly said that this recovery scenario supported by external demand, notably by China, is already unfolding.

On Monday, data released by the government showed that Japanese retail sales last month posted their biggest increase in 13 years.

"Japan, with its weak currency and increasing exports, is in a situation similar to the U.S. back in March of last year when the equity rally began," said Kelly. "They should be doing very well."

Upside and downside

For bullish investors, the leveraged notes with a maximum annual rate of return of 32% are attractive.

"This is a pretty good cap since you can get up to 32% per year with just a 16% [annualized] move of the index," said Kelly.

However, other investors, such as Donald McCoy, financial adviser at Planners Financial Services in Edina, Minn., are more concerned with the downside risk associated with the notes than with the upside potential.

"You may have the leverage, but you don't have any protection on the downside," said McCoy. "With leverage, especially with a cap limiting my upside, I would expect to see some form of downside protection, a buffer for instance, which you don't have here."

Japan versus Asia

In general, McCoy said that he tends to stay away from concentrated bets.

"As far as investing in Japan, I would probably not want to be invested in a country-specific product. I would be willing to have Japan as part of my allocation within an actively managed portfolio but not as a separate bet," McCoy said.

"I'd rather be bullish on Asia as a whole rather than Japan specifically," he said.

Fees are 0.3%.

The notes settled on Monday.

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