SH: Outlook 2014: Convertible bonds

months when first tapering concerns sent US rates higher. From a regional perspective, Japan and the US were the two markets to be in – and we were.

Year-to-date performance

What lies ahead in 2014 for convertible bonds?
We are in a low growth, low interest rate part of the economic cycle with rates likely to edge up in the US. Markets will remain in the hold of central banks and discussions on more quantitative easing (QE) or the first signs of tapering will continue to drive market returns.

We expect solid equity markets, but volatility will increase and setbacks could potentially be bigger than we have seen in summer 2013. Risks clearly come from market stress on the equity and credit side – and here it’s difficult to determine a trigger. On a brighter note, some of the issues that made the headlines in 2013 have seen significant progress (Syrian crisis, US debt ceiling, European banking regulation). We still see convertible bonds as one of the better performing asset classes in this environment. Interest rate protection, a strategic growth tilt and participation in the equity market via a long-term option paired with strong credit selection will provide investors with a good mix of equity exposure and safety.

Primary market

New issues are not only crucial for sustaining a diversified convertible market, they also provide a good alpha source. We expect convertible issuance to continue to point the way to interesting sectors (US cloud computing and bio tech were examples in 2013) and we forecast the strong issuance of the last months to continue well into 2014.
Monthly convertible issuance 2012–13

Demand for convertibles