Outlook 2024: Better days ahead for convertibles?
Lee Manzi and Makeem Asif discuss the outlook for the convertible bond market heading into 2024 and why they believe the dynamics of the asset class are changing for the better.
What does this mean for the convertible bond market?
We’re also seeing a lot more sector diversification compared to the dominance of the mid cap technology names seen over the last few years. These names were hit the hardest as real interest rates rose, eroding the favourable discount rates used to value assumed high top line growth. We believe corporates will continue to buy back deep out-of-the-money bonds and replace them with new more technically attractive convertible bonds that offer better risk/reward profiles for investors. Volatility is a core component to the value of an option and low realised volatility has weighed on valuations in general. However, we believe volatility will likely increase from these low levels as the market digests the end of the monetary policy tightening cycle.
What does this mean for convertible bonds going forward?
Our base case scenario for 2024 is of a soft landing, and we think anything more than a mild slowdown will result in central banks loosening monetary policy. We believe some key investment themes are interesting: sustainability will continue to be at the forefront given its importance in helping to reduce greenhouse gases. We also think semiconductors, cyber security as well as electrification will be important drivers and are well represented in the convertibles bond universe.
In terms of convertible bonds valuations, we believe the market to be attractively priced. Given volatility is historically at the lower end of the range, we think valuations are well supported and provide the potential to add value from here.
Should you have an allocation to convertibles in 2024?
Outlook 2024: A pivotal year?
Periods of transition often raise interesting questions, and this year investors are faced with plenty as they look ahead to what 2024 may bring. Will Western central banks finally start cutting interest rates? Will geopolitical tensions calm or further escalate? And what might a fraught US Presidential election mean for the world?
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