Convertible bonds allow investors to capture AI-driven growth while diversifying the risk associated with hyperscalers in equity indices.
Investors are benefiting from – and at the same time concerned about – the momentum created by hyperscalers. Amazon, Microsoft, Google, Meta, and other AI mega-caps are major contributors to stock markets’ strong performances. Nevertheless, legitimate questions are emerging about the return on investment from these massive expenditures in the short and medium term.
From this perspective, the perceived risk associated with hyperscalers can become an opportunity both upstream and downstream in the AI value chain. The idea is not to allocate capital directly to hyperscalers, but to target mid-sized companies that capture these investments along the AI value chain.
Two advantages for the investor
This approach offers two advantages for the investor. First, by targeting the beneficiaries of AI spending, the investment thesis shifts from a capital-expenditure focus to one driven by sales growth and significant margin expansion (pricing power), converting supply scarcity into a sustainable economic advantage.
The beneficiaries are found across all other segments of the AI value chain. In memory, storage and connectivity, players such as SK Hynix, Western Digital, Lumentum, and Seagate are seeing demand intensify. In computing infrastructure and related services, platforms like Oracle and certain providers of specialist cloud facilities are capturing growing revenue streams. Furthermore, the tools and technologies required for manufacturing AI chips – for example, those offered by BE Semiconductor, Aixtron, or MKS Instruments – are directly benefiting from the acceleration of capital expenditure. In the background, there is also sustained demand for software infrastructure (observability, data) and energy supply, which are two critical links in a sustainable ramp-up.
Furthermore, this approach enables smart diversification beyond mega-caps. Hyperscalers may face margin pressures due to these expenditures, and other players in the AI value chain offer strategic diversification away from the risks of Big Tech concentration in equity indices.
The best of both worlds
In the current environment, convertible bonds are the ideal vehicle thanks to the call option embedded in them; in short, they offer the best of both worlds:
- Exposure to rising stock prices: when the price of the underlying stock rises, the price of the convertible bond increases as the value of the embedded call option appreciates. Convertibles thus capture the upside potential of stocks.
- Bond floor value: in the event of volatility and a decline in equity markets, the bond component and the coupon act as a safety net.
This dynamic is perfectly illustrated by the recent performance of the Datadog stock and bond (Chart 1). The convertible bond exhibits less volatility and fewer drawdowns for a similar performance.
Figure 1: Datadog
In terms of portfolio construction, targeting an equity exposure of around 60% within a convertible bond allocation allows for capturing upside potential while maintaining a bond safety net. This ‘equity’ allocation is particularly relevant for gaining exposure to the AI theme, with the goal of achieving a competitive performance relative to equity markets and an improved risk profile compared with traditional high yield. Historically, the convertible bond segment has also demonstrated a lower default risk than high-yield bonds during periods of stress: during the 2020 Covid-19 pandemic, the default rate reached approximately 7% for high-yield bonds versus nearly 2% for convertible bonds, underscoring their resilience during recessions.
In summary, the investment opportunity with convertible bonds lies in capturing AI-related capital expenditures without any direct exposure to hyperscaler risk. From a ‘technical’ perspective, convertible bonds offer a clear advantage thanks to their asymmetric return profile, combining relative downside protection with potential upside participation.
The opinions expressed herein are correct as at 29 May 2026 and are subject to change without notice. This information should not be relied upon by the reader as research or investment advice regarding any particular fund, strategy or security. Past performance is not a guide to current or future results. Any forecast, projection or target, where provided, is indicative only and is not guaranteed in any way.
