In the News

Barclays’ buffer gears linked to iShares MSCI EM ETF offer bullish bet on emerging markets

New York, April 11 – Barclays Bank plc’s 0% capped buffer gears due April 30, 2021 linked to the iShares MSCI Emerging Markets exchange-traded fund are designed for bullish investors betting on a turnaround in emerging market assets, an asset class that has underperformed for a number of years.

If the fund return is greater than zero, the payout at maturity will be par of $10 plus 2 times the fund return, subject to a maximum gain of 20.1% to 22.1%, according to a 424B2 filing with the Securities and Exchange Commission.

Investors will receive par if the fund declines by 15% or less and lose 1% for every 1% that the ETF declines beyond 15%.

Losing less

The buffer is an attractive aspect of the structure, said Steve Doucette, a financial adviser at Proctor Financial.

“A 15% decline … that would take us back to the October levels. It’s possible, but that’s not a breach. It’s a buffer,” he said.

“If we are in a bear market and it goes down 25%, you only lose 10%. I like to be able to say that to my clients. Not too many people can do that.

“As I look at this note, my main concern is how much of the upside will I capture? It’s a two year. If a recession comes out in 2020, 2021, I’m going to be glad I can outperform by 15% on the downside. 15% is a good number.”

Raising the bar

But Doucette is also very bullish on the asset class. He likes the note because the cap is not too low. However, he would try to improve it.

“You get a decent upside of 10% a year. But is it enough? I have to imagine that if in the next two years we’re up, it’s probably because the bull is still running,” he said.

Based on that view, Doucette would maintain the buffer as is because his goal is to outperform on either side of the market. But he might try to reduce the leverage.

“I would probably raise the cap a little bit, however much I could. I would reduce the leverage to maybe 1.75 or 1.5 and see how much extra cap I could get,” he said.

Bullish bet

The adviser explained why he is bullish on the underlying.

“This asset class is catching up with the U.S. Emerging markets had a terrible year last year, and they’ve underperformed for a while,” he said.

But a cautiously bullish view is probably de rigueur in this environment.

“I can’t help listening to our economists predicting a recession. If it’s not in 2020, it will be in 2021. … Who knows really?” he said.

“Theoretically, if we’re no longer in a bull market in the next two years, if we don’t set a new record, I suspect we’re going to have some kind of correction or pullback.

“On the other hand, if the market is up, it’s going to be really up. Do you need the extra leverage then? If you go from 2% to 4%, is it worth it? That’s the reason why I’d rather raise the cap and cut down on the leverage. This is emerging markets. It can move.”

Optimism on trade

Juan Perez, senior foreign exchange trader and strategist at Tempus Inc., also expressed a bullish view on emerging markets.

“I’m relatively optimistic,” he said.

“The uncertainty over trade issues is having a domino effect that is controlled by two fingers: the China finger and the U.S. finger. Sooner or later they’ll reach some kind of a deal. Many of the uncertainties we’re faced with today will disappear, tensions will ease, which as we go along might help MSCI.

“We have gone through a lot of headwinds between Trump, trade negotiations, Brexit. I think it can only go in one direction now, and that’s in the way of progress.”

Emerging markets have also suffered from the appreciation of the dollar. But Perez said the U.S. currency is poised to weaken.

“Right now the dollar is too strong. It’s a safe bet to see it depreciate against those currencies,” he said.

A weaker dollar increases the price of commodities, which help emerging market economies.

“In Latin America, Brazil will improve. Both Columbia and Brazil are pro-Western countries. They may help the U.S. solve the crisis in Venezuela,” he said.

China’s future is harder to predict.

“They’ve evolved from an industry-based economy to a service-based economy, so we won’t see high single-digit growth rates anymore,” he said.

“Emerging markets depend a lot on China. I think once we get a U.S.-China trade deal, this index will rally.

“I’m pretty optimistic about global markets.

“I think the note is not bad. It’s based on doable and reasonable expectations.”

UBS Financial Services Inc. and Barclays Capital Inc. are the agents.

The notes will price on April 25.

The Cusip number is 06747A821.

Go to article

Let’s Talk
Ready to save money, save time, and reduce risk?

It’s quick and easy to get started. Fill out the form below and a Tempus market expert will connect with you shortly. Our team will work closely with you to develop a personalized strategy for your global payment & currency needs.

Talk to an Expert