Citi’s $190,000 buffer notes on Stoxx to boost lackluster index in high valuation environment

By Emma Trincal

New York, Dec. 7 – Citigroup Global Markets Holdings Inc.’s $190,000 of 0% buffer securities due Sept. 6, 2023 linked to the Euro Stoxx 50 index may appeal to investors who hesitate to invest in the European stock market known for lagging the performance of U.S. equities, advisers said.

“If you’re not too bullish on Europe, this may be a good fit,” said Donald McCoy, financial adviser at Planners Financial Services.

“The leverage can boost your performance.”

If the final index level is greater than or equal to the initial index level, the payout at maturity will be par plus 200% of the index return, capped at par plus 21.4%, according to a 424B2 filing with the Securities and Exchange Commission.

Investors will receive par if the index declines by 10% or less and will lose 1% for every 1% that it declines beyond 10%.

“I wonder why they chose that duration,” said Tom Balcom, founder of 1650 Wealth Management.

“21 months is unusual. Maybe there’s an election in one of those countries at maturity. Or they needed to extend it that way to make the terms work.”

Mandatory allocation

“The Euro Stoxx 50 has been pretty range bound this year, trading anywhere between $30 and $40 if you look at the ETF,” Balcom noted.

He was referring to the SPDR Euro Stoxx 50 exchange-traded fund, which tracks the index.

“If you compare the Euro Stoxx chart with the S&P it looks terrible. The S&P did so much better.”

The Euro Stoxx 50 index gained 13% this year compared to 25% for the S&P 500.

“It’s tough to convince clients to diversify away from the U.S. markets. Nobody wants to go for something lagging behind so much unless you want to do a mean reversion trade,” he said.

Yet Europe is an important allocation in a global diversified portfolio, he noted.

“You have to have exposure to Europe to some degree with or without a strong conviction. You need to diversify,” he said.

Balcom said he allocates 15% of his portfolio to international equity. Out of this bucket, 5% goes to emerging markets, a little more than 5% to the Euro Stoxx 50 index and the rest to other international developed markets.

“For investors who hesitate about European equity, using the 2x leverage to get almost 12% a year with this note is a nice return,” he said.

The 21.4% cap over the one-year and nine-month tenor represents an annualized compounded return of 11.7%.

Return enhancer

Using a structured note can help boost the return of a slowly growing index, such as the Euro Stoxx 50, Balcom said.

“Everybody talks about elevated valuations. Certainly, Europe offers more favorable valuations than our domestic market. But at the same time, everybody focuses on domestic markets precisely because the returns are so attractive.

“If you can enhance the return of an index like the Euro Stoxx either with some leverage or with a digital, that’s beneficial to your clients.”

He gave the example of a GS Finance note he purchased in July.

“It’s a three-year on the Euro Stoxx with 3x leverage, a 30% cap and a 16% buffer. It’s a little longer than this one but with the longer duration, we were able to get more buffer and more leverage.”

GS Finance priced the notes (Cusip 40057HVL1) on July 14 for $2.93 million.

Mildly bullish

Planners Financial Services’ McCoy said the notes would suit the view of someone expecting only modest growth in the index.

“In the next 21 months, if the index goes up approximately 10.5%, you get your 21.4% cap.

“That’s not a ton in terms of what it takes to max out, but we’re sitting at high valuations.

“It’s probably for an investor who wants to stay in the market but doesn’t expect strong returns and may want a little bit of downside protection.

“If the Euro Stoxx is up 9% over the duration of the notes, you get 18%. If it’s down 10% you lose nothing. That’s a little bit of a boost with some protection.

“It’s OK if you want the exposure and if you have some sort of a range bound view,” he said.

Headwinds

McCoy said he is not himself overly bullish on Europe.

“They have some issues. I think the European markets are somewhat more vulnerable, for instance, in how they would adopt very restrictive policies under a more severe wave of Covid-19. European countries are more likely to go into lockdowns. In the U.S., lockdowns have become politically unacceptable. There is no way we’re going to see that happening again anytime soon.

“On top of that you now have Russia that seems to be planning an offensive on Ukraine.

“These are significant risks.

“Granted, valuations of European stocks are more attractive. But there’s probably a reason for that.

“I think the prospects for Europe will continue to lag the U.S. in the near term,” he said.

The notes are for a non-bullish investor looking for a “safer bet” on Europe, he concluded.

The notes are guaranteed by Citigroup Inc.

Citigroup Global Markets Inc. is the underwriter.

The notes settled on Monday.

The Cusip is 17329UNN7.

The fee is 0%.

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