GS Finance’s capped gears tied to Euro Stoxx show ‘amazing’ upside, but tenor may be too short

By Emma Trincal

New York, May 3 – GS Finance Corp.’s 0% capped gears due July 9, 2019 linked to the Euro Stoxx 50 index offer unusually high leverage and cap on the upside for a short-dated note, advisers said. But the term may be a little bit too short, they noted.

The payout at maturity will be par of $10 plus 4 times any index gain up to a cap between 42% and 44.8%, according to a 424B2 filing with the Securities and Exchange Commission.

Investors will lose 1% for each 1% index decline.

Amazing

“If you’re a bull for the next 14 months, this is a pretty impressive note,” said Steve Doucette, financial adviser at Proctor Financial.

“Obviously with that huge leverage and high cap, you’re not going to get any downside protection. That’s part of the territory.

“So you have to decide how bullish you want to be. But yes...the upside is amazing.”

Annual return

At the lower end of the range, a 42% cap over the 14-month period with 4 x leverage would bring to investors a 35% annualized return on a compounded basis. The index would only have to rise by a little bit less than 9% a year to achieve this outcome.

On the higher end of the range at 44.8%, the annualized compounded return would rise to 37.5% and the index performance would have to be approximately 9.5% a year.

Conviction

The current market environment characterized by greater volatility and geopolitical uncertainty makes it difficult to take a short-term view, he said.

“Everybody is saying that we’ll have a recession in 2019 or 2020. The stock market is a leading indicator.

A bear market or even a correction could hit six months before we know we’re in a recession. If that’s the case the notes, which have no downside protection, would take a hit.

“I love the upside potential of this note. I may want to buy it for a small portion of my portfolio and go completely speculative.

“But as an investment, I just can’t be that confident that we’ll be up during that timeframe. I can’t be sure with certainty,” he said.

Bullish

Matt Medeiros, president and chief executive officer at the Institute for Wealth Management, also expressed concern about the short investment horizon.

“This note with its 4x leverage certainly gives the opportunity for someone to enhance a bullish view on the Euro 50, which I think is interesting,” he said.

Too short

Medeiros said he is bullish on the asset class but may not necessarily contemplate the note as it is.

“Typically with these types of notes I would rather go out on a little longer duration even though I’m bullish on this part of the world.

“Though we are optimistic about the Euro 50, we still see a number of headwinds, which are a concern at least short term.

“The terms are nice,” he said. “But I would prefer a little bit less leverage if I could get a buffer.”

The notes are guaranteed by Goldman Sachs Group, Inc.

Goldman Sachs & Co. is the underwriter with UBS Financial Services Inc. as selling agent.

The notes are expected to settle on Tuesday.

The Cusip number is 36254G523.

© 2015 Prospect News.
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