Are recession fears overblown ?

9 January 2019

Cédric Daras

RAM (Lux) Tactical Funds - Convertibles Europe

In December, European stock markets declined by -5.73% (SXXE Index total return) amid signs of a global economic slowdown, Brexit uncertainty and concerns over monetary policy mistakes in the U.S. In 2018, European equities recorded the worst performance since 2011 with a decline of -12% (SXXE Index Total return). Against this backdrop, on an equity sector perspective, defensives (Utilities, Personal goods) outperformed Financials and Industrials over the month. 

The only positive came from Italy, which made a budget concession to Brussels and avoided legal action from EU regulators. Consequently, on the government bond market, the 10-year Italy’s yield spread over Germany decreased by -39 bps over the month at 250 bps. The credit market finished the year on a weak note with spreads approaching levels last seen in early 2016. Over the month, high yield bonds underperformed the investment grade segment (with a widening of +25 bps in average (BofA Euro High yield index) vs +6 bps (BofA Euro corporate index).

The PI EUR Class of the RAM (Lux) Tactical Funds - Convertibles Europe saw a net underperformance of 20 bps vs the Benchmark (Exane ECI Europe) and delivered an overall performance of -2.34% for the month. Relative to its benchmark, the lower exposure to aerospace names was an edge over the period (Airbus, Dassault, MTU Aero), nevertheless the Fund was negatively impacted by its retail (Carrefour, Sainsbury), construction (Implenia) and oil sensitivities. 

On the technical side, the European CBs’ implied volatilities (IV) decreased to 30.3% (-0.5 pts) and the listed options volatility continued to rise. In consequence, the IV spread is now at 3.6 pts, in line with its historical average calculated since 2010 (source Exane). 

The primary market was quiet amid extreme market volatility, with only one new issue from a pharmaceutical company: Almirall 0.25% 2021 (250m EUR). We decided to invest in this balanced profile convertible bond.  Finally, over the month, we saw two repurchase offers from issuers: Bim/Elior 2.5% 2020 and Vodafone 0% 2020, which bought respectively 62% and 50% of their outstanding amount.

*Sources : RAM Active Investments