2016 was a year of contrasts on the convertible bond market in Europe. On the one hand, the European primary market maintained a positive dynamic (USD 29.1 billion in new issues compared with USD 25.6 billion in 2015). The European market has been in a state of continuous expansion since 2012, and, in 2016 alone, it contributed close to USD 11 billion to deposit growth.
On the other hand, the increase in risk aversion has brought about capital outflows from open UCITS funds that are domiciled in Europe and which specialise in convertibles. It is also the longest and most substantial series of outflows seen in the last decade. That said, this needs to be viewed in context: some of these outflows have been shifted into dedicated solutions to ensure the right match between managers’ goals and those of their clients, by integrating the specific regulatory and supervisory environment. Further, relative to similar periods in recent history (such as 2008 or 2011, when performances were highly negative with falls of 27% and 10%, respectively), performances have remained close to balance in 2016, showing the capacity of all convertible managers to adapt to a less favourable environment.
Outlooks for 2017 favourable
In 2017, the theme of reflation will dominate the agenda for the markets. The macroeconomic environment, coupled with the return of inflation and a re-steepening of rate curves, are once again piquing interest in convertible bonds among both issuers and investors.
Convertible bond issuers will be able to make more significant savings on their debt costs, whereas in a zero-interest-rate environment, the marginal savings were weak. This could be reinforced by US tax reforms, which, along with a drop in the corporate tax rate, pave the way for interest charges to no longer be deductible.
For investors, an analysis of performances over more than fifteen years shows that during periods of rate rises, convertible bonds put in positive performances, sometimes even outperforming equity markets (in contrast, corporate bonds saw declines).