Citigroup’s buffered digital plus notes linked to Euro Stoxx 50 aimed at range-bound view

By Emma Trincal

New York, April 25 – Citigroup Global Markets Holdings Inc.’s 0% buffered digital plus securities due April 30, 2024 linked to the Euro Stoxx 50 index can boost returns in a flattish market without limiting the appreciation, an interesting tool for investors unsure about the magnitude of the underlying price moves, sources said.

For foregoing high dividends over a long period of time, investors also get a buffer on the downside.

If the index finishes at or above its initial level, the payout at maturity will be par plus the greater of the index return and the digital return, which is expected to be at least 50% and will be set at pricing, according to a 424B2 filing with the Securities and Exchange Commission.

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

Euro skepticism

Carl Kunhardt, wealth adviser at Quest Capital Management, said that he liked the terms of the note, but his view on Europe is not bullish.

“The structure is good. There’s nothing about the note that I don’t like except the underlying,” he said.

He pointed to the lackluster performance of the euro zone benchmark over the past five years: flat, compared with a return of 12% a year on average for the Dow Jones industrial average.

“I’m not optimistic because it’s a structural problem. Economic growth in Europe is stagnant as a result of dysfunctions within the European Union.

“Italy, Portugal, Ireland still have serious fiscal problems. None of those issues have been addressed. Germany, supposedly the growth engine of Europe, is now cooling off. They haven’t fixed anything.”

While the market has been focusing on the United Kingdom due to the prolonged Brexit crisis, Kunhardt is more negative on the euro zone.

“The biggest problem really is the euro. There’s never been a centralized fiscal policy in the euro zone. You can’t run a centralized monetary policy without fiscal integration.”

Allocation tool

For euro-skeptics like Kunhardt, the notes may actually be beneficial.

“You can’t afford not to invest in Europe,” he said.

“You need an international allocation, and there is no way around it. You have to have the Euro Stoxx in your portfolio.”

The note would satisfy cautiously bullish investors by combining uncapped upside and buffered protection.

“The odds of the Euro Stoxx to be down 25% over five years are pretty low. But you should not discount it. They made the buffer wide enough to make it compelling,” he said.

If by any chance the European index rallied during the term, investors would be able to participate in the upside even above the 150% level.

More likely, the payout would provide a favorable boost.

“The Euro Stoxx will keep on going nowhere. They’ll keep on ignoring the structural issues,” said Kunhardt.

“So that’s an easy 10% a year.

“For someone who does not expect the Euro Stoxx to jump up, the 50% fixed return is not bad at all.

“You have a good downside protection. And if the market is up just a little bit, you can make 10% a year, which is more than what I expect from this asset class.”

Minimum gain

Donald McCoy, financial adviser at Planners Financial Services, said the notes were designed for moderately bullish investors.

“This would work out to be an 8% to 9% annualized return if it’s up or flat. On the downside, it seems like you’re getting a good level of protection,” he said.

“The odds of getting 50% after five years are pretty good because chances are the index will be up at least a little bit.”

Ten years into a U.S. bull market, investors have lowered their return expectations, he noted.

“To be able to capture high single digits with a 25% buffer is not bad. If the Euro Stoxx is down 25%, I’m made even.

“It’s a good way of getting international diversification while having a fairly high probability of getting at least 8% to 9% a year over five years.

“As long as you don’t need the money over that timeframe, you’re in good shape.”

Timing

Andrew Valentine Pool, main trader at Regatta Research & Money Management, said he liked the longer tenor.

“Generally, bull markets can last two to three times longer than a bear market. If we do hit a bear market in the next year – and Europe is already feeling the pain – it’s likely that they will come out of it in five years. Since you only need to be up 1% or even flat to get 10% a year, I think it’s a good deal. It’s definitely good timing,” he said.

The notes are guaranteed by Citigroup Inc.

Citigroup Global Markets Inc. is the underwriter.

The notes were scheduled to price Thursday and will settle on Tuesday.

The Cusip number is 17326YXY7.

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