Goldman on outperformance of global against emerging stocks; notes weather downturns, advisor says

By Kenneth Lim

Boston, Sept. 10 - Goldman, Sachs & Co.'s planned notes linked to the outperformance of global equity indexes against an emerging market benchmark is an interesting strategy that banks on a recovery in advanced economies, an investment advisor said.

Goldman Sachs plans to price the zero-coupon notes due 13 months after issue linked to the outperformance of a global equity basket versus an emerging index.

The basket comprises equal weights of the S&P 500 and the MSCI EAFE indexes, while the emerging index is the MSCI Emerging Markets index.

If the basket increases against the emerging markets index, the payout will be par plus the difference between the return on the basket versus the index. If the basket declines versus the emerging markets index, investors will share in the loss.

If the return on the basket and the index are the same, the payout will be par.

Notes offer long-short strategy

The structure is unusual because it provides the potential for a positive return even if the markets do poorly, the investment advisor said.

"You're essentially taking a long position on the basket and a short position on the index," the advisor said. "They're trying to replicate what a hedge fund might do, or actually, even some individual investors might try to do this on their own."

"It doesn't matter if the basket finishes in negative territory," the advisor said. "The only [criterion] is that it must do better than the index. So there's potential for you to make money even if the basket does poorly."

The notes offered some advantages to investing in the same strategy, either directly or through a fund, the advisor said.

"Buying into a fund may not be ideal for some investors for various reasons, maybe they're small retail investors, maybe they don't want to pay the fees," the advisor said. "If you do it yourself, it can be inconvenient, and when you short anything there's often a risk of losing a lot of money. With a product like this the most you lose is your principal."

Notes suit optimistic investors

The notes make sense for investors who think that emerging stock markets are likely to underperform global equities, the advisor said.

"It's possible that the investor thinks the non-emerging markets like the U.S., London, Japan are going to recover after getting hit the past year," the advisor said. "Remember that you're looking at the relative performance, so you don't have to think that the emerging market index is going to go down or the global basket is going to go up. You just have to think that it's going to go up faster or go down slower."

The U.S. market will also have a large influence on the performance of the basket, the advisor said.

"Technically it's a global basket, but if you look carefully, the S&P 500 makes up 50%," the advisor said. "And some of the markets in the EAFE are pretty correlated with some of those in the emerging markets index, so I think a lot of whether or not this is attractive to you will depend on how you think the U.S. markets are going to do."

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