Citigroup’s $6.05 million capped airbag gears on MSCI EAFE index aimed at cautious bulls

By Emma Trincal

New York, Dec. 13 – Citigroup Global Markets Holdings Inc.’s $6.05 million of 0% capped airbag gears due Dec. 10, 2024 linked to the MSCI EAFE index should appeal to investors seeking exposure to international equities while limiting the risk associated with an underlying asset class heavily weighted in Europe.

If the index return is positive, the payout at maturity will be par of $10 plus 3 times the index gain, subject to a maximum payout of par plus 31.1%, according to a 424B2 filing with the Securities and Exchange Commission.

Investors will receive par if the index falls by up to 20% and will lose 1.25% for each 1% decline beyond 20%.

“What jumps at me is this healthy buffer. Twenty percent over a two-year note, that’s unusual. I don’t think you could do that on the S&P,” said Tom Balcom, founder of 1650 Wealth Management.

“If you believe that Europe is going to recover, it’s a good trade. In fact, if you believe that the global economy is going to improve, that’s a great note.”

Euro focus

The MSCI EAFE index tracks the performance of developed countries ex-North America.

European markets have the largest relative weighting in the index.

Japan is the top country with a 22% weight. But all European countries combined, including non-euro zone members, make for 62% of the index, the U.K. being the largest constituent with a 15% weight.

“You definitely have to like Europe,” said Balcom.

Given the triple leveraged exposure, investors in the notes are probably moderately conservative.

“You’re not overly bullish and you’re cautious too,” he said.

“Even if the index is up only 5% a year, you’ll hit the cap. And 31% in two years is a pretty nice cap.”

The maximum return of 31.1% at maturity is the equivalent of an annualized return of 14.5% on a compounded basis.

“For moderately bullish clients who want international exposure with less risk, this is a pretty good note,” he said.

Inflation

Kirk Chisholm, wealth manager and principal at Innovative Advisory Group, said the underlying asset class did not appeal to him.

“I’m not particularly interested in Europe. I don’t see much upside. Whether it’s Europe or Asia, I’m not sure I feel comfortable given global economics,” he said.

“And to me, the geared buffer is not really a buffer. If you’re down to zero, you’ll lose everything.”

One of his main concerns about Europe was the region’s elevated levels of inflation.

“Europe has a big inflation problem. Most countries over there have a double-digit rate of inflation,” he said.

He pointed to Italy, the U.K. and Germany, which have inflation rates of 11.8%, 11.1% and 10.4%, respectively.

October low

The Euro Stoxx 50 index, which comprise euro zone members, has jumped by a third in the past two months.

But such market moves are not indicative of a long-term bullish trend, he said.

“Yes, Europe has rallied since mid-October, but so did the U.S. All markets have gone up since the low of October,” he said.

For Chisholm, the roots of inflation overseas are not necessarily the war in Ukraine.

“I don’t think the war really had an impact on market prices. The war is not priced in. You had higher oil prices before the war, higher commodity prices before the war.

“The culprit is Covid and the post-pandemic environment. The real cause of inflation is the global supply chain disruption.

“Once you go through a pandemic, you have a lot of structural problems.

“The only thing that has helped Europe so far is the stronger dollar,” he said.

Headwinds

A financial adviser said he would take a pass on the notes because of his negative view on Europe. In his case geopolitical concerns were at the forefront.

“When you buy the EAFE, two-thirds of your investment is in Europe. As an asset allocator, I have to invest in this part of the world.

“But I’m not sure I like the risk-reward of the notes. You’re taking the risk in a continent that’s currently at war.

“Europeans also have a big energy crisis, in part self-inflicted,” the adviser said.

While the 20% buffer was attractive, the gearing was not.

“It’s not the same as a straight buffer. You’re accelerating your losses at a rate of 1.17. Who wants their losses to be compounded?”

The war, energy shortages were not the only problems faced by Europeans.

“In the U.S. we’re still debating over a recession. Are we in a recession? Is it official? It’s not a debate in Europe. They are deeper into a recession than we are.

“Looking at the risk, I don’t think I would take that bet, especially on a two-year,” the adviser said.

The notes are guaranteed by Citigroup Inc.

Citigroup Global Markets Inc. and UBS Financial Services Inc. are the agents.

The notes settled on Friday.

The Cusip number is 17330X326.

The fee is 0%.

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