Martin Haycock, senior product manager at Fisch Asset Management, recently joined the InvestmentEurope Oslo Roundtable 2018, to outline ongoing opportunities in the convertible bonds (CB) asset class.
Here he provides further detail on the state of the convertibles market, and what investors can expect going forward – in a year in which issuance has been strong.
Q: Has the recent ECB announcement about tapering its APP led to any impact on the convertibles market, or expectations of impact in future?
A: While the convertible bond market is a unique asset class, its performance is nevertheless driven by all the component markets, in particular equity, credit and interest rate. The ECB announcement has an impact in all these areas, which flow through into CB performance. Above all, the longer term impact of higher rates in Europe will be increased CB issuance.
Q: In which markets across Europe do you expect demand for convertibles to remain strongest through 2018 and into 2019?
A: The two core end investor markets for long-only convertible bond investment are France and German-speaking countries, in particular Germany and Switzerland. Current anecdotal evidence points to investors focusing more on global strategies and less on pure European strategies. We see continued interest from German speaking investors for a more defensive alternative to current levels of equity exposure, and an allocation to convertibles is a perfect way to achieve this. This trend is likely to intensify between now and year-end given the stage we’re at in the current macroeconomic cycle.
Q: How do calculations for upside opportunity and downside protection stack up in light of equity markets volatility and corrections earlier this year?
A: In the correction earlier in the year, CBs did their job perfectly. They fell by less than half the amount of the equivalent equities. With the correction came a reduction in the exposure of CBs to equities, meaning CBs has increased protection against further market declines. Since then, markets have recovered, as have convertible equity exposure
Q: What is the issuance level of new convertibles like? Has it been sufficient for some time? Or would you prefer to see a bit more paper come to market?
A: 2018 is shaping up to be one of the best years for CB issuance in the period since the Financial Crisis in 2008. January 2018 was huge, the $16bn of new paper making it the biggest month for nearly four years. May and June have both been especially active in the US. All this follows five years of ‘steady’ global issuance which has kept the market at a more-or-less constant size. We always like to see new paper and new issuers come to market, and ideally alongside new fund flows into the asset class.
(Source: UBS Convertibles Marketing / Thomson Reuters)
Q: Is there a particular role for market makers in the convertibles space, given that it crosses over from the fixed income to the equities markets? And if so, what is your view of the impact of regulatory changes/costs on the availability of market making services that convertibles managers may be dependent on?
A: The CB market is highly competitive and liquidity is naturally important for all market participants, including both long only and hedge fund investors. The CB market making environment is much more akin to other segments of the fixed income markets than to the equity markets. As such, a shift post Mifid towards electronic trading is definitely underway, although it’s still a little early to determine the impacts.
Q: Looking forward in the medium to longer term, how do you feel convertibles instruments will fare should interest rates in developed markets return to their long term historical averages?
A: CBs are not as sensitive to interest rate rises as most fixed income instruments; an increase in the option value partially offsets decreases in bond value. Rising rates will mean far more CB issuance as companies shy away from issuing straight debt at higher yields, presenting an enormous opportunity for the CB market.
For further information on the Oslo Roundtable 2018 see: http://www.investmenteurope.net/past-event/oslo-roundtable-2018/