A Brief respite or real trend?

13 February 2019

Cédric Daras

RAM (Lux) Tactical Funds - Convertibles Europe

After a stormy December, resulting in both a China and U.S. economic slowdown concerns and growing uncertainties, the dovish tones from central banks were perceived as a positive catalyst.  Investors went back to risky assets suggesting that the worries of an imminent recession were overblown, and a slowdown already priced in. In this context, the European equities market ended the month in positive territory (+6.3% for the EUROSTOXX Total Return). Sectors which have suffered the most during the last quarter of 2018, strongly outperformed (Basic Resources+12.96% and Automotive +11.57%) while the Telecommunications sector delivered a negative performance (-1.47%) as a result of the highest downward revision to earnings growth.

On the credit side, the iTraxx Main tightened by 18 bps to reach 71 bps and the XOver by 43 bps to reach 310 bps. European core sovereigns were steady to lower (-9 bps for the German 10 years) at 15bps. Italian yields continued their decline (-15 bps for the 10-year yield) while the Spanish yield showed the highest drop (-22 bps for the 10-year note).

Convertible bonds have benefited both from equity market rally and credit spread tightening. The PI EUR Class of the RAM (Lux) Tactical Funds - Convertibles Europe delivered a net performance of 1.88%, representing an underperformance of 60 bps versus its benchmark (Exane ECI Europe). On a relative basis, the Fund suffered from its underweight on Industrials (Airbus, MTU), IT (STM) and Consumer Discretionary (Kering, LMVH), while the overweight on Consumer Staples (Carrefour) was the most positive contributor.

On the technical side, implied volatilities slightly declined to reach 30%, while the spread of implied volatility between convertible and listed options have widened by 4 points to reach 6.8 points.

The primary market has started the year with 1.4 Bn€ of new convertible bonds: Cellnex tapped upsized existing note by 150m€, Sika came with a 3YR CHF 1.3bn Subordinated mandatory, and Takeaway launched a 250mn€ 5Yr CB. We stayed away from all these issues. Sika because the mandatory do not any offer downside protection. given the lack of barrier to entry on its business, combined with a poor level of profitability (Ebitda margin still negative in 2018). Cellnex due to its high financial leverage situation.

If exposure to risky asset gained traction thanks to more attractive valuations, we continue to stay disciplined and do not succumb to the current general euphoria.

*Sources : RAM Active Investments