Barclays’ $9.65 million buffered leveraged notes tied to EAFE: advisers weigh the risks

By Emma Trincal

New York, Oct. 4 – Barclays Bank plc’s $9.65 million of 0% buffered SuperTrack notes due March 26, 2024 linked to the MSCI EAFE index offer a compelling buffer, advisers said, but the geopolitical and macroeconomic risks associated with the underlying developed markets index, in particular Europe, may give some investors pause, they added.

The payout at maturity will be par plus 1.5 times any index gain, up to a maximum payout of par plus 33.5%, according to a 424B2 filed with the Securities and Exchange Commission.

Investors will receive par if the index falls by up to 25% and will lose 1.3333% for each 1% decline beyond 25%.

Non-negotiable buffer

Tom Balcom, founder of 1650 Wealth Management, felt confident about the exposure to the MSCI EAFE index despite the risks involved with a painful energy crisis and a war in Ukraine because the downside protection was large enough in his view.

“I like the downside buffer. After what we’re going through in the market this year, clients have become more defensive. The downside protection is of paramount importance to them. So, they’re more likely to go for a note with a 25% buffer. 25% is a pretty good size even if it’s a geared buffer,” he said.

“I know many analysts believe that the market has fallen enough this year so that you have an opportunity to buy the dip. I agree with that to some degree.

“But clients want to be protected. You have to cater to your audience and people have turned a little skittish.”

Tradeoff

Over the 18-month duration of the notes and based on the cap and leverage factor, the maximum return is 21.2% per year on a compounded basis.

“The cap is nice – more than 20% a year. If by any chance you underperform on the upside, it’s easy to explain why. You had the downside protection. With notes, you always have to bend in one direction. More upside means less downside and vice-versa,” he said.

Threats versus protection

The underlying index consists of stocks of companies in developed markets. European markets make for more than 60% of the index.

“There are geopolitical risks in Europe and it’s a concern of course. You have the war in Ukraine and Putin’s threats of nuclear escalation. You can’t model that out and you can’t discount the risk,” he said.

“At the same time, 25% is a big buffer. It adds a lot of value and provides a level of comfort to clients who are precisely concerned about those risks.”

Dangerous winter

Donald McCoy, financial adviser at Planners Financial Services, was reluctant to get exposure to the underlying index.

“You’re buying into a market that has already undergone a significant price compression, which is not a bad thing,” he said.

“But we’re also on the cusp of a global recession and the EAFE is particularly vulnerable given the strong European component. We don’t know what’s going to happen this winter in Europe and what the impact of fuel rationing is going to look like. As Europe is still dealing with the Russian invasion, they’re scrambling to get replacements in natural gas,” he said.

The energy crisis in the region will likely have dire consequences on the economy.

“It’s going to impact your GDP. We’re still not sure what’s going to happen with global earnings. P/Es may be recalibrated, and we may have greater market sell-offs,” he said.

The short tenor may not help mitigate the risks associated with the exposure to developed markets ex-U.S.

“The note gives you a 25% buffer and you have 18 months to recover. It would be nicer if it were a longer maturity,” he said.

“Over the long term, international equities probably offer better value than U.S. equities, but short-term, I believe that they carry more risk.”

Geopolitical crisis

Threats of a nuclear attack from Russia as the war in Ukraine drags on are in investors’ minds.

“People imagine Putin dropping bombs over major cities. If they end up using nuclear strikes, they’re more likely to use tactical nuclear weapons on the battlefield,” he said.

“In my view this is not the biggest risk. A nuclear war is what grabs the headlines, but a shortage of natural gas is more likely and would have a very negative impact on Europe.

He offered an example.

“If a car manufacturer has to operate fewer hours due to energy restrictions, they will produce fewer cars and you’ll have fewer workers. That’s the vicious cycle of a recession.”

Growing pains in the U.K.

Another wildcard was the inflation crisis in the United Kingdom.

“We’ve seen a lot of volatility in global equity and bond markets as a result of the new U.K. prime minister announcing a huge tax cut,” he said.

New prime minister Liz Truss announced an extensive tax cut package last week along with subsidies to help consumers deal with inflation and rising energy costs. Perceived as highly inflationary, those plans led the pound to plummet, and U.K. government debt yields to spike.

“Getting exposure to the EAFE index is probably what makes me hesitate to invest in the note. And the concern is not just Europe. Having exposure to Japan is not particularly enticing either,” he said.

Japan is the top country allocation in the index with a 22.5% weight.

The U.K. is the second largest country with a 15.51% weight.

Barclays is the agent.

The notes settled on Monday.

The Cusip number is 06748XWP2.

The fee is 0%.

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