1. Newsroom
  2. The appeal of convertible bonds in volatile market conditions
Menu
UBP in der Presse 08.03.2019

The appeal of convertible bonds in volatile market conditions

The appeal of convertible bonds in volatile market conditions

Agefi Indices (25.02.2019) - The large amounts of convertible bonds issued in 2018 have created new investment opportunities.


Convertible bonds have had one of their best-ever starts to a year. However, investors’ risk appetite was sorely tested in 2018 because of concern about global growth and political developments in several regions of the world. Those conditions caused equity volatility to increase substantially, and investors will probably have to get used to more volatile markets given the numerous uncertainties that remain.

However, few are willing to give up their equity exposure altogether. Although economic growth is softening around the world, it remains well above recession levels. Also, the sharp market correction in late 2018 brought global equity valuations down to more reasonable levels. Finally, in an environment of low interest rates, particularly in Europe, bond yields still offer a poor alternative to equity dividend yields.

In this transitional period, the convexity of convertible bonds is a key advantage. By adding an equity component to a bond investment, convertibles allow investors, via the conversion option, to maintain equity exposure while benefiting from the defensive attributes of traditional bonds, provided they carry out in-depth analysis of the issuer’s credit quality beforehand.

Historically, the combination of a bond floor with a “call option” on the issuer’s shares has been clearly advantageous for convertible investors over the long term, providing them with equity-like returns over a complete market cycle and significantly reduced volatility and downside risk. Another major advantage is that convertibles are much less sensitive to changes in interest rates than a bond investment with the same maturity.

After the financial crisis and until 2017, equities naturally outperformed in a context of sustained and synchronised growth, expansionary monetary policies and strong earnings growth.

However, given the current uncertainties, convertibles have regained a clear competitive advantage, having shown their ability to alleviate the shocks that have affected the equity market. That was the case in 2018, when convertibles, with their lower volatility and the benefits of the bond floor, demonstrated solid resilience against sharp corrections in equity markets. Convertibles have also shown good momentum during the early-2019 market rally: in January, the Thomson Reuters Global Convertibles index captured more than 70% of the rise in the MSCI World Net TR index (both hedged into EUR).

In this advanced phase of the economic cycle, the global convertibles market also offers exposure to the shares of some highly sought-after companies, particularly those addressing the digital economy, emerging-market consumer and healthcare themes. Another notable fact is that most recently-issued convertible bonds have been from companies whose growth prospects rely more on positive secular trends than on the economic cycle. They are companies that have the potential to generate greater returns, with relatively low debt levels, but also solid cash generation prospects and relatively limited funding requirements: these are major advantages at a time of growing caution about credit risk.

Overall, large amounts of new convertible bonds were issued in 2018 globally. Almost half of these were from first-time issuers, offering convertible investors greater diversification opportunities at a time when valuations in the asset class remain lower than their historical average. The context is therefore supportive, and convertibles should continue to provide investors with exposure to the equity of high-quality companies, while limiting the risk of volatility and occasional corrections.

Read the article

CLAVERIE BUKTE Scarlett.jpg

Scarlett Claverie-Bulté
Investment Specialist

Basselier_Marc_150x150.jpg

Marc Basselier
Head of Convertible Bonds

Meistgelesene News

UBP in der Presse 07.06.2019

Gold ist eine gute Wahl, das Portfolio abzusichern

Finanz und Wirtschaft - Norman Villamin, CIO Private Banking der Union Bancaire Privée (UBP), rät Investoren, Marktrisiken mit asymmetrischen Anlagestrategien zu begegnen.

UBP in der Presse 30.07.2019

Gewinne mitnehmen oder Korrektur riskieren

Le Temps (29.07.2019) - Nach einem fulminanten ersten Halbjahr dürften die nächsten sechs Monate äusserst spannend für die aktiven Manager werden.

UBP in der Presse 26.08.2019

UBP fast-tracks its private banking operations in Asia

Hubbis (22.08.2019) - Michael Blake is CEO of the Asian private banking operations of Union Bancaire Privée (UBP) and is presiding over a phase of dramatic growth for the business in Asia, where assets under management have surged more than 50% since 2016.

Auch lesenswert

UBP in der Presse 17.10.2019

A pragmatic approach to the carbon-reduction effort

The Good Investment Review (10.2019) - The very different roles of Emerging and Developed markets

UBP in der Presse 08.10.2019

Cyberschutz als Kriterium bei der Bankwahl?

Le Temps (07.10.2019) - Das Private Banking kann nie ruhen, und seine jüngste Herausforderung ist die Bekämpfung der Cyberkriminalität.

UBP in der Presse 03.10.2019

What investment opportunities do demographic trends offer?

Bilan (02.10.2019) - Climate change, demographic movements, changing consumer behaviour and innovation are transforming our old habits.