Barclays’ leveraged notes tied to Taiwan, Hang Seng China indexes seen as bullish, speculative

By Emma Trincal

New York, April 14 – Barclays Bank plc’s 0% capped leveraged notes linked to a basket of two Asian equity indexes is a speculative bet focusing on Taiwan designed for bullish, country-specific investors, financial advisers said.

The tenor will be between 18 and 21 months, with the exact maturity date to be set at pricing, according to a 424B2 filing with the Securities and Exchange Commission.

The basket consists of the Taiwan Stock Exchange Capitalization Weighted Stock index with an 80% weight and the Hang Seng China Enterprises index with a 20% weight.

The payout at maturity will be par plus 1.68 times to 1.8 times any basket gain. Investors will be exposed to any basket decline.

High tech heavy

“It’s heavily weighted in the Taiwan stock exchange index,” said Tom Balcom, founder of 1650 Wealth Management.

Investing in Taiwanese stocks means a high concentration in the high-technology sector but also in a limited number of stocks, he said.

“If you look at another Taiwan equity benchmark, the MSCI Taiwan index, you will find a huge concentration on IT stocks. One company, Taiwan Semiconductor Manufacturing, makes for 23% of the index.

“I don’t think we would be looking into this because we don’t do country-specific bets. We don’t even do sector bets.”

For bulls

But for investors with a specific view on the two Asian indexes, the upside can be appealing, he noted.

“You get leverage and no cap,” he said.

“If you want exposure to essentially Taiwan, this is a purely bullish play. It’s a great trade if you’re optimistic about those markets. You definitely have to be bullish to tolerate the lack of any barrier or buffer. You give up the protection in order to boost the upside. That’s why the trade is bullish. If you wanted some downside protection, you would have to cap your return.”

Balcom said he would not consider the notes because he likes to have some downside protection.

Also, the underlying basket does not meet his criteria for investing.

“We would use a basket for diversification purposes. This one is too concentrated,” he said.

“We’re more broad-based when we use international equity. We could do Asia-Pacific or a euro zone type of basket but probably not one linked to only two countries, especially when one of the two countries represents almost the entire basket.”

Region, sector bet

Juin Chin, senior investment specialist at Modera Wealth Management, LLC, also noted the high concentration in semiconductor and high-tech stocks in the Taiwan Stock Exchange Capitalization Weighted Stock index.

“Fifty eight percent, or nearly 60%, of this index is in high-tech stocks,” he said.

“This would not be appropriate for us.

“We don’t bet on regions, and we don’t bet on sectors.”

He noted that both Asian benchmarks suffered hefty losses four years ago.

“In 2011, the Hang Seng China Enterprises dropped 17.50%. During the same year, the Taiwan benchmark saw a pretty big drawdown of negative 20.15%.

“It’s a pretty speculative bet given this type of volatility and given that there is no downside protection,” he said.

For a bearish or modestly bullish investor, the notes would not be appropriate. But a bull may be attracted to the notes for the unlimited upside and 1.75 leverage multiple.

Sources used the 1.75 leverage factor, which corresponds roughly to the mid-point of the range.

“It’s not three times up, but it’s 1.75 times, and that’s better than one-to-one. By allocating 57%, you get 100% of your intended exposure,” he said.

But the excess concentration of the underlying basket is the main drawback, in his view.

“It’s a pure speculative bet in the Taiwan market,” he said.

“Although you can’t ignore the 20% weight in China, China in this portfolio is kind of small.

“From my philosophy standpoint, we wouldn’t use this type of product because we simply don’t take such specific bets on countries or sectors.”

Barclays is the agent.

The Cusip number is 06741UUD4.

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