Is the market going too fast?

15 March 2019

Cédric Daras

RAM (Lux) Tactical Funds - Convertibles Europe

Market commentary

In February, the European stock market maintained its risk-on mode with a rise of +4.09% (SXXE Index total return). It was mainly fuelled by a dovish Fed stance, signs of stabilization of U.S. and Eurozone PMIs (following a steep deceleration), and a delay in the Brexit vote (to the 12th March). Furthermore, the Q4 earnings season has been getting underway: 78% of the stoxx600 companies released results, posting an overall eps growth at 6%y/y (+4% ex Energy) and surprisingly positively by 3%. It is interesting to notice that 57% beat eps estimates (source JP Morgan). Against this backdrop, on an equity sector perspective, cyclicals (construction, chemicals) and financials outperformed defensives (utilities, telcos) over the month.

On the government bond front, after reaching a two-year low (0.08%) at the beginning of the month, the German 10yr bund yield ended at 0.17% (- 4 bps over the period). It was impacted by lower inflation expectations and the prospect of fresh ECB stimulus measures.

Regarding the Euro credit market, spreads pursued the recover from the late-2018 sell off and reached 3.5-month lows. High yield bonds outperformed their investment grade segment, with a tightening of -40 bps on average (EUR HY all sectors OAS / EUOHHYTO Index) vs -11bps (EUR IG all sectors OAS / EUOAIGTO Index).

Portfolio commentary

The PI EUR Class of the RAM (Lux) Tactical Funds - Convertibles Europe Fund saw a net underperformance of -55 bps vs the benchmark (Exane ECI Europe) and delivered an overall performance of +0.82% for the month.

Relative to its benchmark, the overweight positions in Michelin and Carrefour (which released better-than-expected earnings) was an edge over the period. Nevertheless, the main headwinds came from the lower exposure to short dated and/or high delta convertible bonds (LVMH, ICA Gruppen) and to specific names (Inmarsat gained +10% following new rumours of a possible takeover bid). Furthermore, our currency hedge strategy was also a challenge in relative terms, as illustrated by the strengthening of GBP vs EUR (+1.6% with 7.7% of the ECI Europe Index which is represented by GBP denominated convertible bonds).

On the technical side, implied volatility slightly declined to reach 29.5% (-0.5 pts) while the spread of implied volatility between convertible and listed options widened at 7.1 points.

On the primary side, February ends with no primary deals.

*Sources : RAM Active Investments