Morgan Stanley’s trigger gears tied to basket offer highly levered bet on international stocks

By Emma Trincal

New York, April 29 – Morgan Stanley Finance LLC’s 0% trigger gears due in March 2025 to May 2025 linked to a basket may be used by asset allocators who see the need to boost returns in a slowing global economy, an adviser said.

The basket consists of the Euro Stoxx 50 index with a 40% weight, the FTSE 100 index with a 20% weight, the Nikkei 225 index with a 20% weight, the Swiss Market index with a 7.5% weight, the S&P/ASX 200 index with a 7.5% weight and the Hang Seng index with a 5% weight.

The notes at maturity will lever up 4 times the basket return without capping the gains, according to an FWP filing with the Securities and Exchange Commission.

Investors will receive par if the basket declines by 25% or less and be fully exposed to the basket’s decline from its initial level if it declines by more than 25%.

“What strikes me first is the leverage,” said a financial adviser

“Having no cap on the upside is expected. It’s such a long-term paper. But four times the upside is pretty amazing,” he said.

European tilt

Another characteristic was the relative unbalance between Europe and the other countries constituting the basket.

In that regard, the basket mirrors the country allocation of the iShares MSCI EAFE index, which tracks the performance of developed markets ex-North America.

The underlying basket is used extremely routinely in the U.S. structured products market with varying weightings.

“What is different here is this 4x leverage,” the adviser said.

The EAFE index allocates 60% to Europe, which includes the euro zone, the U.K. and Switzerland. The basket extends this weighting to over two-thirds of the portfolio.

“Obviously you want the European exposure,” he said.

This adviser said that he was neither bearish nor aggressively bullish on this part of the world.

The sluggish performance of the asset class spells value. But the region is confronted by problems.

“We know that the outlook is not strong for the European economies,” he said.

“That’s why the leverage can be a good thing.”

EAFE replacement

Another third of the basket goes to Japan, Australia and China.

Those countries are represented in comparable proportions in the EAFE index.

“It’s a six-year play on international markets. As an asset allocation, it’s a convenient way to capture some leverage,” he said.

“Rather than leaving your international exposure in the EAFE where you don’t have any leverage and protection, you can use this to boost your returns four times with no cap.”

The return enhancement may be especially valuable if the global economic slowdown persists.

“I’d take a good look at this note for my equity bucket. It’s a decent vehicle to replace an international allocation,” he said.

Long and risky

Matt Medeiros, president and chief executive of the Institute for Wealth Management, was not interested in the notes.

“I’d be very nervous on that one just because it’s so heavily weighted in Europe. There are opportunities in Europe but there are still tremendous headwinds,” he said.

The four-time leverage was a consideration for a long-term bull play. But for Medeiros, having to extend the maturity for such a long period of time carried more risks than benefits, including credit risk exposure.

“The very high leverage is going to be expensive. You have to pay for it,” he said.

Part of the “cost” was the amount of dividends investors must forgo during the period, the relative lack of liquidity and the long-term credit risk exposure.

“I don’t really see any point in holding this note for six years,” he said.

The notes will be guaranteed by Morgan Stanley.

Morgan Stanley & Co. LLC is the agent. UBS Financial Services Inc. is acting as dealer.

The notes will settle on April 30.

The Cusip number is 61768Y166.

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