Barclays’ dual directional notes on Nasdaq to outperform in sideways market, advisers say

By Emma Trincal

New York, Oct. 5 – Barclays Bank plc’s 0% dual directional barrier notes due Oct. 31, 2024 linked to the Nasdaq-100 index offer excess returns if the index finishes in correction mode but limited gains on the upside, which would be acceptable for investors only in a slowing market, advisers said.

If the index finishes at or above its initial level, the payout at maturity will be par plus the return of the index, up to 23.5%, according to a 424B2 filing with the Securities and Exchange Commission.

If the index falls but not below the 80% barrier level, the payout will be par plus the absolute value of the return of the index.

Otherwise, investors will lose 1% for each 1% decline of the index from its initial level.

Lower expectations

“This is for someone who has very modest return expectations. You’re not looking for a home run,” said Tom Balcom, founder of 1650 Wealth Management.

“A 23.5% cap over three years is not ambitious. But the returns we’ve had over the past 10 years have been above average. With this market at all-time highs, people have lower return expectations,” he said.

For the same reason, investors also want some downside protection, he added.

“It’s an 80% barrier with absolute return. You just hope it doesn’t breach in three years,” he said.

Pricing absolute return products is challenging in today’s market environment, he said.

“Rates are still low and so are dividends. It’s tough to squeeze out better terms.”

Managing expectations

Balcom said absolute return notes can be popular. But they may also create bad surprises. Delivered with a barrier, the absolute return may, in some cases, be a source of dissatisfaction for clients.

“The Nasdaq is down 19%, I make 19%. That’s great. It’s down 21%, I lose 21%. That’s a problem,” he said.

“We could have a big decline short term. Single digit performance in that case is a possibility. Depending on how long and how severe the market decline is, the cap may actually work in this scenario,” he said.

While Balcom said he liked the absolute return feature, his preference would be to see a buffer in place of a barrier on the downside.

“I can see myself opting for a buffer versus the absolute return. I’d rather be flat at the end than down 25%.”

Range bound

Donald McCoy, financial adviser at Planners Financial Services, said the notes would be efficient in a sideways market.

“This is geared toward people who are moderately positive and moderately pessimistic about the index,” he said.

“The market is going to toggle around for that three-year lock-up period and the view is that you’ll end up with mid-single digit returns on the upside or if it goes down, a drop that’s not too severe.

“As long as the market trades in a band between -20% and +23%, you are in good shape. You’ll come up on top.”

High performer

The Nasdaq-100 index has been rallying over more than a decade, he noted. Some investors believe the uptrend will continue; others are concerned about high valuations especially if interest rates rise during the period.

Since March 2009, the index has increased more than ten-fold.

“It’s been a positive volatility by and large,” he said.

Short-lived downturns

While it’s always risky to buy an asset at or near record highs – the Nasdaq peaked in early September – investors are attracted to the tech-heavy benchmark, he said.

“Part of the appeal of the Nasdaq is that it bounces back quickly.

“That’s why people like it,” he said.

Aside from the February-March 2020 correction, which hit all U.S. equity markets and was too short-lived to be called a bear market by most analysts, the last time the Nasdaq had a significant decline was in October 2018. By January of 2019, the index was already rebounding, he noted.

“This doesn’t mean there is no risk on the downside. No one really knows where the market will be in three years. But the Nasdaq is popular because you don’t have to wait too long for a rebound.”

The exception was the dot.com bubble burst, but “this period of extreme speculation was unique,” he said.

The right outlook

Aggressive investors would not risk investing in the notes with a 23% cap over three years, he noted.

“This would be another type of risk, which you wouldn’t take if you’re bullish,” he said.

McCoy concluded that investors may have two opposite reactions to the deal.

“If you believe like most prognosticators that we’ll see a reversion to the mean with a market advancing much more slowly than it has in the past, if you’re not that optimistic about the global economy post-Covid and don’t expect corporate earnings to continue to grow, then the notes are a good way to tap into that moderately pessimistic outlook,” he said.

Conversely, bulls and bears alike would most likely avoid the notes.

Barclays is the agent.

The notes will price on Oct. 26 and settle on Oct. 29.

The Cusip number is 06748WMD2.

© 2015 Prospect News.
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