Barclays’ $23.55 million market-linked step-up autocalls on banks to outperform muted returns

By Emma Trincal

New York, Nov. 30 – Barclays Bank plc’s $23.55 million of autocallable market-linked step-up notes due Dec. 2, 2024 linked to a financial basket allow investors to make a medium-term sector bet in an uncertain environment, providing double-digit returns in a lackluster market.

The basket consists of the common stocks of Goldman Sachs Group, Inc. (33.34% weight), JPMorgan Chase & Co. (33.33% weight) and Morgan Stanley (33.33% weight), according to a 424B2 filing with the Securities and Exchange Commission.

The notes will be called at par of $10 plus a call premium of 14.6% a year if the basket closes at or above its initial level on any annual call date.

If the notes are not called and the basket finishes above the step-up value, 135% of the initial level, the payout at maturity will be par plus the basket gain.

If the basket finishes at or below the step-up level but at or above the initial level, the payout will be par plus the step-up return of 35%.

Investors will lose 1% for every 1% basket decline from initial level.

Complicated picture

Ed Moya, senior market analyst at multi-asset trading firm Oanda, said that banks are now facing new challenges due to rising uncertainty around the global economic recovery and inflation.

“So far Wall Street was expecting a global recovery along with a continued rise in long-term bonds. But the Omicron variant has introduced uncertainty again and we’re seeing some signs of panic. Risk aversion is coming back, and Treasury yields are falling as people seek safe assets,” Moya said.

“Current selling pressures in the stock market reflect fears that the Fed got the inflation wrong.

“They just said they may be forced to accelerate the tapering. The market expects to see rate hikes sooner next year.”

Flight to quality

Speaking before a Senate panel on Tuesday, Federal Reserve chairman Jerome Powell said that the bond tapering could be over “a few months sooner” than planned. Powell also said that the word “transitory” no longer describes the current inflation picture.

The 10-year Treasury yield dropped on Tuesday as negative headlines around the Omicron Covid-19 variant pushed the Dow Jones industrial average down 622 points.

Bank stocks have enjoyed a strong year as short-term interest rates were kept unchanged and recovery expectations moved long-term bond yields higher, he explained.

“I don’t think the 10-year is going to move much higher because people are getting increasingly concerned about a recession. The expectation that inflation could send the economy into a recession because the Fed will have to hike sooner is now putting the market under pressure. The flight-to-quality trade is on,” he said.

New challenges

Bank profits benefit from a steep yield curve, but since last week’s sell-off on Friday, the Treasury curve has flattened, he added.

The 10-year Treasury was as high as 1.69% the day prior to Thanksgiving. On Friday it dropped to 1.47% amid a heavy equity sell-off triggered by Omicron variant headlines.

“The market is getting pummeled. Many traders see growing risk to the long-term outlook,” he said.

“A much better scenario for the economy and the banks would have been a gradual taper with one rate hike next year. But it doesn’t look like it’s moving in that direction.”

Financials have been among the top four sectors this year along with tech, energy and real estate, he noted.

But financial stocks are facing new challenges.

“Another issue for banks will be coming from DC. New regulatory initiatives from the Biden administration may restrict some of their behaviors,” he said.

“Banks are going to have a tougher time.”

Resilient sector

Given the rising volatility in the market and uncertainty around inflation and economic growth, forecasting the health of the banking industry in three years is challenging, he said.

“Recent developments complicate the outlook. The new variant could cause a recession. It could also make the inflation picture worse with new shortages and supply chain disruptions. Inflation is difficult to forecast,” he said.

Despite growing risks, the note may still be a good vehicle to get exposure to the financial sector.

“There is no downside protection. But you can get called each year during the term,” he said.

“The three-year maturity is not bad because the mid-term elections will be over by then.

“Banks, especially those three, have demonstrated during the pandemic that they can maintain profitability benefiting from the trading side.

“Those banks should do well. I think investors will remain committed to the sector.

“Overall, I think the note is pretty attractive.”

Equity replacement

Tom Balcom, founder of 1650 Wealth Management, said he liked the notes too.

“These are three household names that everybody recognizes,” he said about the underlying basket components.

One main decision for advisers is how to allocate the product in the portfolio.

“14.6% is a nice, juicy coupon. But I would probably use it as part of my equity exposure given the risk.

“I would prefer to see some downside protection. But with the protection, you would never get this kind of return,” he said.

“So, you really sacrifice the protection for the yield. It’s the tradeoff.”

Balcom said that a nearly 30% return in two years is “nice.”

Even if the 35% step return at maturity is lower than what a hypothetical call premium would have been after three years (three times the 14.6% annualized premium), the payout at maturity offered the advantage of being uncapped, he noted.

“If you believe that market returns are going to be muted going forward, this is a nice way to outperform the sector.

“I like the trade,” he said.

BofA Securities, Inc. is the agent.

The notes (Cusip: 06747Y696) will settle on Wednesday.

The fee is 2%.

© 2015 Prospect News.
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