GS Finance’s $10 million bet on international basket requires strong geopolitical conviction

By Emma Trincal

New York, Feb. 13 – GS Finance Corp.’s $10 million of 0% basket-linked buffer autocallable securities due Feb. 10, 2028 tied to a weighted basket of international equity indexes provide exposure to non-U.S. markets, which require a careful assessment of geopolitical risks in an increasingly dangerous world, advisers said.

The basket consists of the Euro Stoxx 50 index with a 40% weight, the Nikkei 225 index with a 25% weight, the FTSE 100 index with a 17.5% weight, the Swiss Market index with a 10% weight and the S&P/ASX 200 index with an 7.5% weight, according to a 424B2 filing with the Securities and Exchange Commission.

The notes will be automatically called at par plus 12% if the basket closes at or above its initial level on Feb. 7, 2024.

If the notes are not called and the basket return is positive, the payout at maturity will be par plus the gain.

Investors will receive par if the basket falls by up to 50% and will lose 1% for each 1% loss beyond 50%.

Eurasia

“The notes are structured in such a way they should let you navigate this extremely risky geopolitical environment both in Europe and in Asia,” said Carl Kunhardt, wealth adviser with Quest Capital Management.

About two-thirds of the basket represents exposure to European markets. The remaining third consists of the Asia-Pacific region (Japan and Australia), he noted.

One issue with the underlying was the correlation between the individual markets within each region, he noted.

“Unlike a worst-of, if you invest in a basket, you want diversification. They picked indices like the Euro Stoxx and the FTSE for instance that are likely to move in the same direction. You’re not doing yourself any good with concentration,” he said.

He noted that the underlying almost “mimicked” the iShares MSCI EAFE ETF (ticker: “EFA”) which also provides exposure to Europe, Australia and Asia.

“You wonder why they created this basket. Why can’t they do it on the EFA?” he said.

Ukraine, Taiwan

The difficulty in analyzing the notes came from the two-tier payout: the possible autocall after one year paying a fixed return and the unlimited upside at maturity, he said.

“Since you don’t know if it’s a one-year note or a five-year note, you have to think a lot in terms of ‘what-if.’ On top of that we’re in this terrible geopolitical environment. It’s not exactly a fun time!”

Looking at the call scenario, the conflict in Ukraine made any forecast challenging.

“The only real question is: do I think the war will still be going on in 12 months? If you think it will be over, then it’s a no-brainer. A call with a 12% annual return is very attractive,” he said.

“My problem is that I don’t really have a strong feeling on that.”

In addition, a possible Chinese invasion of Taiwan could create another tail risk for the Asia-Pacific countries, which are represented in the basket, he noted.

“If we have such a mess in Taiwan, it will affect Japan and Australia especially as we’ll approach the Presidential Elections. Biden will be tested during the campaign. He’s already being tested by China,” he said.

European economy

Investors considering the notes should also have a relatively positive outlook on the European economy.

“Most analysts predict a continued soft economy in the U.S. through the summer followed by improvements through the end of the year, assuming the Fed doesn’t mess it up,” he said.

Traditionally, Europe follows the U.S. when it comes to an economic recovery, he added. But again, timing was key over a one-year timeframe.

“How fast will Europe begin to improve? It may take more time than just a year,” he said.

A strengthening of the European economy could be delayed by negative developments in Ukraine.

“If the Russian military makes a single mistake, like sending a missile in Poland, you could imagine Biden having to commit forces over there. NATO is a Treaty, and its members are committed to protect each other,” he said.

Solid buffer

Despite those major geopolitical risks, Kunhardt had a positive opinion on the note.

“If you expect the note to last one year, if that’s what you believe, then the 12% return is great because it’s guaranteed unless it’s negative,” he said.

“If it’s negative, you’re going to the five years. Now, will the market be higher in five years? You have to think chances are really good.

“Will the war in Ukraine be resolved? Most likely.”

But those views remained hypothetical. What really reduced the risk was the structure itself, he said.

“Five-year note or not, you have this 50% buffer, which is terrific. Even though you have all those headwinds, the note is giving you a pretty strong downside protection.

“The only downside is that it can be a five-year. If you don’t get called, you’re in for a long time and you lose the dividends. That’s the only negative thing,” he said.

But the call option in one year combined with a deep buffer at maturity made the notes attractive.

“I would do it,” he said.

Likely call

Scott Cramer, president of Cramer & Rauchegger, Inc., analyzed the two possible scenarios – call and participation after five years. Although the possible outcomes may not be negative, he said he would not use the notes.

“It wouldn’t be my favorite way to get that non-U.S. exposure,” he said.

The unknowable length of the product was not really a drawback.

“In this market, anything can happen in any country or any time. But there’s a relative likelihood you should be called after one year.

“If you hold the note for five years, you should be OK because there is a long enough time for things to settle.

“And to be fair, they give you a generous protection,” he said.

Tough environment

But the geopolitical risk could not be overlooked.

“Maybe you’ll get called. But you’d better be comfortable with the world outside of the U.S.,” he said.

A five-year holding period offered pros and cons, he said.

“More things can go wrong in five years. But usually, time is on your side.”

The defensive aspect of the structure mitigated some of the risks. But the volatility and uncertainty in the global economy were not enticing.

“Chances are you should be OK.

“But international markets are uncertain. If you want exposure to this asset class, there are better ways to do it,” he said.

The notes are guaranteed by Goldman Sachs Group, Inc.

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

The notes settled on Friday.

The Cusip number is 36264U793.

The fee is 2.5%.

© 2015 Prospect News.
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