Is the stock market ignoring fundamentals?

5 July 2019

Olivier Mulin

RAM (Lux) Tactical Funds - Convertibles Europe

Market environment

Despite mixed global economic data, risk assets and government bonds rallied in June. Risk assets were spurred by central banks’ dovish rhetoric and hopes that a damaging global trade war could be resolved (as talks between the U.S. and China resumed at the end of the month). Against this backdrop, cyclicals, growth and momentum thematics outperformed defensives and value names over the period. Regarding the Euro credit market, spreads continued to tighten with an outperformance from the high yield segment. All eyes will be now on the upcoming Q2 earnings season to assess the combined impact of a slowing economic growth and a rise in companies’ input expenses.

Portfolio commentary

The PI EUR Class of the RAM (lux) Tactical Funds-Convertibles Europe Fund saw a net underperformance of 23 bps vs the benchmark (Exane ECI Europe) and delivered an overall performance of +1.06% for the month.

Relative to its benchmark, the overweight positions in specific French names (Carrefour, St Gobain, Michelin and TF1) coupled with a lower exposure to German real estate (impacted by a 5-year freeze on rents in Berlin) was an edge over the period. Nevertheless, the main headwinds came from the underweight in growth stocks thematic (LVMH, Sika), a lower equity sensitivity (- 2 pts in average) and a lower duration. 

On the technical side, the convertible bond implied volatility declined slightly by 0.7 pts to 28.1%. The spread of implied volatility between convertible and listed options stayed unchanged at 5 points.

There were five new issues on the primary market for a global amount of 1.7 bn €: Derwent 1.5% 2025, Geely/Volvo 0% 2024, Primary Health 2.8% 2025, Petropavlovsk 8.25% 2024 and Cellnex 0.5% 2028. We stayed away from what we consider issuers with weak fundamentals.

*Sources : RAM Active Investments