Morgan Stanley’s $1.03 million buffered PLUS on Stoxx set to outperform, advisers say

By Emma Trincal

New York, Oct. 26 – Morgan Stanley Finance LLC’s $1.03 million of 0% buffered PLUS due Oct. 23, 2026 linked to the Euro Stoxx 50 index provide terms allowing bulls and bears alike to outperform the underlying index, advisers said.

If the index return is positive, the payout at maturity will be par plus 165% of the index return. Investors will receive par if the index declines by 20% or less and will lose 1% for every 1% that it declines beyond 20%, according to a 424B2 filing with the Securities and Exchange Commission.

No cap

“I always like to see leverage + no cap + buffer. To me this is a good combination. You can outperform in both directions,” said Steve Doucette, financial adviser at Proctor Financial.

“We like to maintain international exposure. Europe has been a laggard, but they did pretty well last year after the markets got slaughtered.”

Between October 2022 and July, most equity markets recovered from last year’s bear market. The S&P 500 index during that time surged by 49% while the Euro Stoxx 50 jumped 44%.

Laggard

The Euro Stoxx 50 index fell last year yet it outperformed the S&P 500, losing 15% versus 18%, respectively.

For the year to date, the performances of the Euro Stoxx and the S&P 500 are relatively in synch, both showing single-digit gains.

However, each year since 2013, the Euro Stoxx underperformed the S&P at the exception of 2017 and 2022.

“If you want exposure to European stocks, the terms of this note are pretty sweet,” he said.

“The only question is where are we going to be in three years? Of course, nobody knows.”

Excess return

One advantage of the asset class was its lower valuation compared to the U.S. market.

“If you believe in mean reversion, if you see Europe coming back, then you can take advantage of the leverage and no-cap. That’s a great bull play,” he said.

The structure also offered a chance to outperform on the downside.

“If we have a delayed recession and the market is down, you have that 20% buffer.

“If we don’t have that recession, you get 1.65x unlimited upside.

“Either way, you win,” he said.

Low-tech

The bullish case relied more on value than growth.

“The relative value of Europe versus the U.S. depends on which cycle you’re looking at,” he said.

“Over the past five years, the gap has been huge. The Euro Stoxx has been a drag on most portfolios. So, I think there’s potential for upside,” he said.

“But are they the next AI? I don’t think so.”

The two sectors – technology and communication services – combined make for 37% of the S&P 500 index versus only 16% for the Euro Stoxx 50 index.

Tweaking

Given that the Euro Stoxx 50 is not as growth-oriented as its U.S. counterpart, Doucette did not rule out modifying the payout.

“Maybe you want to increase the leverage and add a cap. I don’t know. Perhaps 2x leverage and a large cap,” he said.

“I would have to see the pricing before coming up with numbers. You want to strike the right balance between the leverage and the cap.

“But overall, those terms are pretty good.”

Close to home

Matt Medeiros, president and chief executive of the Institute for Wealth Management, said the notes offered substantial protection, which to him was a priority at this time.

“It’s a pretty straightforward structure, which is good.

“Buying notes like that in this market environment makes a lot of sense,” he said.

He said he particularly liked the 20% buffer not just for its size but because it had no leverage built into it.

Geopolitical risks are rattling the market since the start of the war in the Middle East between Hamas and Israel, he noted. Although geopolitical tensions are brewing all around the world, Europeans are “a little closer” to the conflicts, he said.

“Any continued crisis could put more pressure on oil supplies just as Europe is going into the winter. That’s a big issue for a region that is oil-dependent,” he said.

The war in Ukraine was an ongoing drag on the European economy, with Europe facing increasing threats from Russia.

Medeiros said he liked the notes in this uncertain environment.

“You need defensive notes when you consider all of the potential headwinds, such as wars and unrest, not knowing if the conflict will spread, not knowing who is going to get involved, why and where,” he said.

Protection first

On the positive side, the underlying index still offers good prospects.

“Europe has been an underperforming asset class relative to the S&P for some time,” he said.

“I do see opportunities. Having 1.65x leverage with no cap is very attractive, especially when you’re getting exposure to an undervalued market like Europe.”

But again, Medeiros said the he is concerned about geopolitical risks, which is why he favors the 20% buffer more than any other terms.

“It’s one thing to use this note as a speculative play with some potential for growth.

“But you want to have a solid downside protection. The buffer here meets that requirement.

“I like the note,” he said.

The notes are guaranteed by Morgan Stanley.

Morgan Stanley & Co. LLC is the agent.

The notes settled on Wednesday.

The Cusip number is 61775MEY8.

The fee is 0%.

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