GS Finance’s buffered PLUS tied to iShares MSCI EM ETF offer tactical play with Asian tilt

By Emma Trincal

New York, Aug. 14 – GS Finance Corp.’s 0% buffered Performance Leveraged Upside Securities due March 3, 2021 linked to the iShares MSCI Emerging Markets exchange-traded fund couldn’t come at a better time for some value investors seeing in the current Turkish lira crash an opportunity to buy the dip in emerging markets.

The emerging markets tumble as well as the underlying ETF, which is overweight China, make for a good tactical and contrarian bet, they said.

If the fund return is positive, the payout at maturity will be par of $10 plus 200% of the fund return, subject to a maximum payout of $13 per $10 of notes, according to an FWP filing with the Securities and Exchange Commission.

Opportunity

Investors will receive par if the fund declines by up to 10% and will lose 1% for each 1% decline in the fund beyond 10%.

“Interesting ... I have an emerging market notes coming due in two weeks. Perfect timing,” said Tom Balcom, founder of 1650 Wealth Management.

Despite the current Turkish lira crisis, which has rattled markets over two consecutive sessions since Friday (the selling pressure eased on Tuesday), Balcom said that he was comfortable with the underlying ETF, seeing little to no risk of contagion.

Asian portfolio

“Nearly half of this ETF is in two Asian countries: China and South Korea. Turkey doesn’t have a big allocation at all, it’s merely half of a percent,” he said.

“The risk of contagion is more in Europe than in China and South Korea. I could be wrong but I don’t think we’re headed toward a major global recession because of Turkey.”

The underlying fund is indeed overweight Asia. Nearly three-quarters of the portfolio is allocated to an Asian country. China represents alone more than 31% of the fund followed by South Korea with a 14% allocation.

The third largest country is Taiwan with a 12% weighting followed by India with over 9%. Malaysia, Thailand, Indonesia and the Philippines account for nearly 10% of the total.

Big tech

Balcom said he also liked the concentration in technology.

The top four holdings in the portfolio are Tencent Holdings Ltd., Alibaba Group Holding, Taiwan Semiconductor Manufacturing and Samsung Electronics Ltd.

“16% of the portfolio is in those four tech giants,” he noted.

Allocation

As an asset allocator, Balcom said investors should have emerging markets as part of their core portfolio.

“I always recommend people to have some allocation to this asset class. Using a note to get that exposure is the best way to do it,” he said.

“This note has a 10% hard protection and a decent cap,” he said.

Current valuations in emerging markets also made the product more compelling, he said.

“You can use the note as a tactical play as well,” he said.

“Emerging markets haven’t done so well so far this year. So, you’re buying at a reasonable level,” he said.

The ETF share price is down 11% so far this year.

More defensive

For more safety, however, Balcom said he would consider reducing the leverage in order to increase the size of the buffer.

“The 30% cap is nice. The two-and-a-half year term is fine. But I would probably want to get more downside protection even if it means cutting the leverage a little bit ... like from two to 1.5 for instance.”

Blood in the streets

Steven Jon Kaplan, founder and portfolio manager of TrueContrarian Investments, has been looking for an opportunity like the Turkish currency crisis for some time.

“Certainly, emerging markets are relatively unpopular. As a contrarian investor, I see that as a positive,” he said.

“The cap on this note is not too bad .... not ideal but at least there is a bit of protection.”

For Kaplan, severe sell-offs can provide buying opportunities.

“Turkey actually is a very good thing. This country’s stock market is very reasonably valued. There’s too much fear. I would be looking for a note linked to Turkish equity but I don’t expect to see a deal like that coming up anytime soon,” he said.

Domestic bear

Going back to the MSCI Emerging Markets ETF, Kaplan said the risk of a global emerging markets crisis was not a major concern.

“What should keep people up at night is not a big price drop as we’re seeing in Turkey or in some emerging markets. What should make people worried is how overvalued the U.S. market is right now as prices haven’t dropped significantly yet,” he said.

Kaplan is bearish on U.S. equities and has positioned his portfolio as such.

Lower entry

Asked about the fact that China represents nearly a third of the underlying ETF, Kaplan said Chinese valuations were compelling as an entry point.

“At least China, especially Mainland China, has already dropped a lot this year,” he said.

The db X-trackers Harvest CSI 300 China A-Shares fund, which tracks this market, is down 22% year to date.

“Such significant corrections give you somewhat of a buffer. That’s why it’s already protected.”

The only part of the deal Kaplan felt less enthusiastic about was the tenor.

“Right now, I stay away from the three-year type of investment. Two-and-a-half year, three years ... it’s not ideal because the market could end up significantly lower at the end of 2020 or in 2021,” he said.

“I’d much rather see this type of structure on a five- or six-year term.”

The notes are guaranteed by Goldman Sachs Group, Inc.

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

The notes are expected to price on Aug. 31 and settle three business days later.

The Cusip is 36255U620.

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