Barclays’ $1.2 million barrier notes on Emerging Markets index require patience, conviction

By Emma Trincal

New York, Feb. 16 – Barclays Bank plc’s $1.2 million of 0% barrier SuperTrack notes due June 11, 2026 linked to the MSCI Emerging Markets index offer the advantage of uncapped leverage and barrier protection over a reasonable timeframe, advisers said. But picking one’s exposure to the risky asset class demands informed judgment and high tolerance for risk, they noted.

If the index’s return is positive or zero, the payout at maturity will be par plus 141.25% of the index’s return, according to a 424B2 filing with the Securities and Exchange Commission.

Investors will receive par if the index falls below 80% and will be fully exposed to the index decline if it drops more than 20%.

Investing in the notes requires a higher level of conviction in the underlying theme than most U.S. equity-based notes, said Steve Doucette, financial adviser at Proctor Financial.

Gains for tomorrow

“A lot of smart people are saying that emerging markets is where you’re going to get most of your returns in the next seven to 10 years,” he said.

“I’ve always believed in the global economy. But the global economy has been hit hard since Covid. We’ll have to see if it comes back.”

Investors bullish on emerging markets had to show resilience in the face of lackluster returns.

The iShares MSCI Emerging Markets ETF, which tracks the underlying index, has underperformed the SPDR S&P 500 ETF for the past 10 years except in 2017, according to Morningstar.

That year, the emerging markets fund rose 36.42% versus 21.69% for the S&P 500 ETF.

“Emerging markets can post phenomenal gains. But it has not been the case over the past few years. You have to believe in mean reversion. I do,” he said.

“We just hope the global economy comes back fast.”

Recession impact

The interdependence between emerging markets’ economic growth and the U.S. economy could boost or slow the return of the underlying index.

“We are the number one consumer in the world. Are we going to drive them or are they going to drive themselves?”

A recession in the U.S. would have a contagion effect on emerging markets.

“If we don’t buy stuff from them, their economies are going to suffer,” he said.

Emerging markets are risky and volatile in general, he noted.

“You have geopolitical risks, you have currency risk, you have a ton of risk,” he said.

Exchange rate risk

Noteholders could be negatively impacted if the U.S. dollar appreciates.

The U.S. Dollar index hit a five-year high at the end of September, fell since but has begun to rally again this month.

A stronger dollar would hurt noteholders in several ways.

First, the securities, which are bought in non-U.S. currencies, would see their value reduced when converted into U.S. dollars. Second, a higher dollar weighs on emerging countries as it increases the cost of their U.S. dollar-denominated imports. Finally, a stronger U.S. dollar and higher U.S. interest rates make emerging markets and other risky assets less attractive to investors as competitive yields with less risk may be found in bonds.

International allocation

Despite those challenges, Doucette allocates 20% to 30% of his portfolio to international equity with emerging markets accounting for 6% to 8% of it.

“Emerging markets haven’t been a good diversifier. But I still believe in it. In all likelihood, a consumer-driven emerging markets growth is going to be the next story,” he said.

Reshuffling it

Doucette said he liked the structure of the notes for the most part.

“I like that there’s no cap. You don’t want to cap yourself up, holding it that long,” he said.

The 40-month maturity was also favorable.

“If we continue this bear market for a little while, we should be on the rebound by then,” he said.

The leverage could be better, he added.

“If I put out a bid, I may get more leverage.”

A sure way to improve the upside leverage would be to decrease the size of the barrier.

“The hard part is to pick the right protection level. A buffer would chew up your leverage.

“I could look at a 90% barrier but it’s tough to say. Over 40 months, it may be enough, but who knows?

“It would also depend on how much more leverage I could get,” he said.

One other way to reduce the risk was to position-size the note.

“It should only be a small portion of the portfolio.”

Overall, Doucette found the notes to be a good fit for an allocation to the MSCI Emerging Markets index.

“If you like the asset class, it’s a decent note. It gives you the opportunity to capture more upside. Instead of buying the ETF you can do this and leverage up your return. There is no cap.

“It’s a good opportunity to get exposure to emerging markets,” he said.

Buffer, a must

For Matt Medeiros, president and chief executive of the Institute for Wealth Management, the risk was too great given the underlying and the type of protection offered.

“This is an asset class that you have to be very patient with,” said Medeiros.

“I probably wouldn’t be a prospect for this kind of note because I would rather have a buffer versus a barrier.

“I just think there is too much risk involved and I would prefer more insurance on the downside than return enhancement.”

Some of the risks involved with the index came from the composition of the portfolio.

China represents about a third of the index. Taiwan, which is at risk of a conflict with China, has a 15% weight.

“There is a significant level of uncertainty around the Chinese market,” he said.

“You need to have a speculative mindset.

“Considering the constituents of the index, I’m not sure I would send out a trial balloon in this space.”

Barclays is the agent.

The notes settled on Tuesday.

The Cusip number is 06749NPL0.

The fee is 0.35%.

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