Commentaries

Will market volatility provide opportunities?

14 December 2018

Cédric Daras

RAM (Lux) Tactical Funds - Convertibles Europe

 

In Europe, the agreement reached with the UK still needs to be approved by the British parliament. Pending the upcoming OPEC meeting in December, oil prices were pulled down by over-supply, losing 22% and closing the month at $50.9. Finally, this context of slowing economic growth as recorded in Q3 combined with disappointing earnings guidance was not conducive to further risk taking. Therefore, the European equity market ended the month in negative territory (-1.09% for the EUROSTOXX total return). We noticed a strong underperformance of the momentum style (-4.15% for MSCI Europe Momentum net return) Vs Growth and Value (respectively -0.59% and -1.09%).

On the credit side, the iTraxx Main widened by 7 bps to 81 bps and the XOver from 35 bps to 333 bps. Italian yields declined (-21bps for the 10 year) on hopes the nation’s leaders are willing to back down on their budget deficit.

In this context, the PI EUR Class of the RAM (Lux) Tactical Funds - Convertibles Europe delivered a net performance of -1.22%* in November, representing an outperformance of 43 bps versus its benchmark (Exane ECI Europe).

On the technical side, implied volatilities declined slightly by 1 point to reach 30.8%, while the spreads of implied volatility between convertible bonds and listed options tightened by 1.2 points to reach 6.4 points. 

The primary market was calm with EUR 0.8 bn of new convertible bonds. Qiagen made the largest issue with USD 500m followed by Cosmo EUR 175m and ADO properties 165m. We stayed away of these new issues for technical and/or fundamental reasons.

The secondary market has been marked by two negative events over the month. As we continue to be highly disciplined at this stage of the cycle, the Fund was not impacted by the material decline of Nyrstar 5% 2022 (-43%) and Vallourec 4.125% 2022 (-34%), both victims of the combination of two negative factors (high leverage and a cash burning situation).

 

*Sources : RAM Active Investments