No complacency : Remain focus on fundamental !

14 August 2019

Olivier Mulin

RAM (Lux) Tactical Funds - Convertibles Europe

After a positive beginning of the month driven by a favorable start of the Q2 earnings season, European stocks slipped before the FED meeting and the lack of progress on the trade dispute between the US and China. If European equity index return was slightly positive, the month has been also marked by a higher dispersion and volatility as investors become extremely nervous at this stage of the cycle: any publication below expectations has been hardly penalized. The opposite was also true. Amid this context, defensive sectors (Food & Beverage, Healthcare, Utilities) outperformed cyclical sectors (Basic Resources, Oil &Gas, Banks and Auto). Spreads have slightly tightened on the European credit market, while the high yield segment underperformed high grade. Government bonds yields continue to move lower: The Italian 10YR yield decline by 56 bps, and outperformed the German 10YR yield -0.11%.

Portfolio commentary.

The PI EUR Class of the RAM (Lux) Tactical Funds - Convertibles Europe Fund delivered a net performance of 0.63% in July, representing an underperformance of 63 bps versus its benchmark (Exane ECI Europe). The Fund suffered from its underweights on Capital goods (Airbus, MTU Aero Engines) and Technology (STM). On the other hand, the underweights on Building materials (Sika) and Health Technology (Qiagen), as well as the overweight in retail (Carrefour) were positive contributors.

The primary market was calm with one new convertible issues: 600m€ of Wordline 0% 2026. We stayed away from this already well-priced equity story.

The convertibles market was marked by the takeover talks between and Just eat. If an agreement by exchange of shares will positively impact the financial ratio of (Just Eat has a positive 12 months EBITDA), we continue to stay away from this story: operational synergies are low in this business, and the competition has recently increase leading to a price deflation.

On the technical side, implied volatilities increased slightly by 0.8 point to reach 28.9%, while the spreads of implied volatility between convertible bonds and listed options widened by 1.4 points to reach 6.4 points. 

*Sources : RAM Active Investments