Barclays’ $640,000 buffered notes on VanEck Vectors Russia to offer bet on value, inflation

By Emma Trincal

New York, May 21 – Barclays Bank plc’s $640,000 of 0% capped buffered notes due May 25, 2022 linked to the VanEck Vectors Russia exchange-traded fund, offer an opportunistic exposure to an asset likely to benefit from current inflationary forces within the one-year time horizon, said Steven Jon Kaplan, founder and portfolio manager of True Contrarian Investments.

If the final ETF price is greater than the initial ETF price, the payout at maturity will be par plus the ETF return, capped at 10.85%, according to a 424B2 filing with the Securities and Exchange Commission.

If the final ETF price is less than or equal to the initial ETF price but greater than or equal to the buffer value, 85% of the initial ETF price, the payout will be par. Otherwise, investors will lose 1.17647% for every 1% ETF decline beyond 15%.

Time horizon

“One-year is a good timeframe,” the contrarian investor said.

“A year from now, Russian stocks should be higher.”

Kaplan analyzes macroeconomic and technical trends. His view on Russia derived from a bearish outlook on U.S. equity markets.

“Downtrends in global markets never happen all at once. Even within one economy you never see everything fall at once, at least not in the beginning of a bear market.

“U.S. markets usually peak first. Then come emerging markets. They tend to make later highs.”

He gave the example of the 2007-09 bear market.

“The U.S. peaked in October 2007. Emerging markets reached their highest point around May, June 2008, close to a year later.

“So, I think one of the best aspects of the trade is its length,” he said.

Tech under pressure

It may not be yet visible for most investors, but for Kaplan, the U.S. is already in a bear market.

“Big tech, high growth stocks have begun to drop in January and February,” he said.

The share price of Tesla Inc. for instance closed at $580.88 on Friday, 35.5% off its Jan. 25 all-time-high of $900.40.

Apple Inc., which also peaked in January closed on Friday 13.5% lower.

Amazon Inc. is near correction territory from its April 30 high.

Both Alphabet Inc. and Facebook Inc. are about 5% lower than their recent highs of April.

“The Covid stocks that did so well last year like Zoom have even started to drop earlier,” he noted.

Zoom Video Communications Inc. has lost more than 45% since its October record high.

One bubble at a time

Asset bubbles rarely burst simultaneously. Deflationary forces vary based on fundamentals, geographic regions, and various macroeconomic factors.

“Emerging markets will hold better for another year or so. Even if they start to go down in March or April, Russia should still be OK. In fact, it’s not impossible to imagine Russia hitting record highs at the time the notes mature.

“Asset prices tend to drop progressively. When you look at emerging markets, some will peak sooner than others. Russia, as well as Brazil, are not among the most expensive emerging market countries. They’re unlikely to collapse first.

“The timing of the notes is good,” he said. “I expect several non-U.S. assets to peak by that time, like gold miners and emerging markets. If those assets peak in the first half of 2022, it will work well for the notes.”

Commodity bandwagon

Another factor playing out well for Russia, a large commodity exporter, is the resurgence of inflationary forces in the global economy, he said.

The Covid pandemic generated deflation across the world but the recovery is bringing back inflationary forces.

“Oil prices have surged, which will benefit the Russian economy,” he said.

Russia is the second largest exporter of crude oil after Saudi Arabia.

The country’s vast natural resources will benefit from a rise in inflation.

“Russia doesn’t just export oil. They’re also a large producer of precious metals, iron, copper and nickel.

He pointed to the positive correlation between inflation and commodities.

“The Russian economy is closely tied to commodities prices. Russian stocks will go up in the current inflationary environment,” he said.

Energy stocks make for a third of the VanEck Vectors Russia ETF.

Rotation cycle

Russia is a relatively undervalued emerging market compared to others such as China, he said.

“Russian equity markets should also benefit from a shift among investors moving away from big tech into value stocks, a rotation that is already underway,” he said.

“When inflation and rates are low, people are willing to pay high P/E stocks. But when inflation rises, they turn to value.”

He pointed to the negative correlation between technology stocks and interest rates.

“Valuation methods have a negative impact on growth stocks in times of higher interest rates while it’s the opposite with value.”

With the impressive bond sell-off in March, the rotation has picked up in momentum.

“With higher interest rates, tech stocks are struggling. People want lower P/E assets, value-oriented securities. That’s favorable to countries like Russia,” he said.

Asset reallocation

Rising prices have the characteristic of forcing investors to review their portfolio. Motivations include the need to hedge the eroding impact of inflation or to capture higher yields from cheaper fixed-income investments.

“Higher interest rates create competition between assets. People find value from other types of securities like commodities and bonds. As investors reallocate to gold, metals, energy, Russia may offer attractive returns as well as an inflation hedge.”

Structure

The structure offers no leverage and caps the upside. But it gives a buffered protection over a short period of time, he noted.

“Certainly, the cap is a constraint. But at least you have 15% in hard protection. The only way the notes can work against you is if the underlying goes up a lot.”

Kaplan did not expect this to be the case.

“I don’t think you’re giving up a lot on the upside,” he said.

“Commodities, emerging markets including Russia will drop before going back up.

“Inflation is a long-term trend and the momentum for real assets and emerging markets will end sometime in the next few months. But I see these assets beginning to pick up again around October, November with a rally extending over the spring of 2022.”

For Kaplan, the absence of leverage did not matter much. More important was the downside protection.

“But what I like best is the length of the trade,” he said.

Barclays is the agent, and J.P. Morgan Securities LLC and JPMorgan Chase Bank, NA are placement agents.

The notes settled on May 12.

The Cusip number is 06748EPR8.

The fee is 1%.

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