2024 is likely to witness lower growth and disinflation without a hard landing, as per Lombard Odier Investment Managers. The asset manager believes that this scenario is conducive to convertible bonds. In terms of region, Lombard prefers Japan and stays neutral on China while being upbeat about the US.
The asset manager predicts, “In 2024, Asian convertible bonds could help investors maintain exposure to growth in the region, solve timing issues, navigate macroeconomic uncertainty by providing convexity, and offer higher yields than those available from issuers of similar credit quality in other regions.”
Arnaud Gernath, Co-head of Convertible Bonds at Lombard, states that the equity market rotations have made a noticeable impact on the performance of convertible bonds over the last two years. He expects the trend to continue in 2024. However, Gernath also states the absence of the US mega-caps in the convertible universe has negatively impacted the asset class in relative terms.
The asset manager says that geopolitical risk is likely to persist next year, which implies that oil and gas prices could stay volatile and on the higher side. Hence, in terms of sector preference, Lombard’s global convertible bond strategy focuses on underweight sectors that are adversely impacted by a higher oil price in the broader transportation industry.
As per Lydia Chaumont, Head of Client Portfolio Managers for Convertibles at Lombard Odier, convertible bonds are likely to benefit from specific dynamics pertaining to bond supply, valuations, and a sudden uptick in volatility. “Convertible and high-yield issuers will need to refinance over the next two years. We expect this to have a positive impact on the asset class,” asserts Chaumont.
The asset manager informs that convertible bonds have a low direct duration of around 2-3 years, restricting the impact of rate moves. “However, the ‘indirect duration’ of the asset class could lead to outperformance if rates fall,” states Lombard.
Additionally, the asset manager believes that in a recessionary scenario, convertible bond strategies can be more defensive than a 40/60 multi-asset strategy while offering similar potential upside. “A 40/60 strategy would perform well under our base case scenario because of its higher duration, but the risk of it underperforming due to the dominance of the mega-cap stocks in equity indices remains,” cautiones Chaumont.
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