MARKET COMMENTARY
Most of the market activity in March can be summed up in two words: tariffs and Germany. There were clearly other forces at work, but the effects of the first 5% of Donald Trump’s second mandate on global trade, risk asset performance, sentiment and international relations have been keenly felt, with ripples progressively spreading to all corners of the investable universe. In the US, the initial euphoria after the elections has dissipated in the face of an administration which appears to be indifferent to the risk of a recession. Tariff-induced upward price pressure could lead to stagflation against a backdrop where lofty valuations are reliant on robust underlying growth. There is one possible glimmer of hope for investors who had pinned their hopes on the US driving global growth in 2025 – if the gradual roll-out of tariffs proves to be too punitive, President Trump could be amenable to negotiation and order could be restored. US confidence gauges are clearly reflecting weaker consumer sentiment but hard government statistical data (employment and manufacturing) remain firm, suggesting fears are overblown. This gap has waxed and waned for some time, but in the current turbulent environment, it has gained in importance. The hard data indicate that the economy is moderately cooling, but the labour market remains solid even if consumer spending (retail sales) figures are less encouraging. The Federal Reserve has so far chosen to look through the data and keep rates on hold, but the market is now expecting two or even three cuts in 2025. Treasuries were mixed, with some curve steepening, the dollar index fell for a third straight month, gold rallied over 9%, Bitcoin dropped, bringing year-to-date losses to nearly 12%, the oil price rose late in the month, and the tech-heavy Nasdaq slipped 8%.
Thankfully other drivers of performance have come into play as the US wobbles. Better performance in Europe – a relative underweight for many in 2024 – has soothed many worried brows. With the suspension of the debt brake in Germany and infrastructure spending plans akin to those post-reunification, Berlin has removed the fiscal drag that has weighed on Europe for more than a decade. If the European domestic growth engine starts firing on all cylinders, the region could deliver above-trend growth, leading investors to reallocate while boosting valuations. The Dax has risen more than 11% year-to-date; Chinese stocks have also done well year-to-date, driven by strong underlying profits, enthusiasm over the development of AI in the region, regulatory relief and better sentiment. Recent data suggest there are some green shoots in the economy (even for the property market) and that Beijing is becoming more business-friendly, although the geopolitical situation remains tense.
The encouraging news for convertible-bond investors is that a regionally well-diversified portfolio with a quality credit bias and strong stock selection has outperformed both bonds and equities year-to-date. As we saw in 2024, convexity is back and has largely protected investors during the turbulence of the past few weeks.
NEW ISSUANCE
Issuance volumes rebounded strongly in March as USD 13.3 billion in new deals came to market. The US led the way with USD 8.2 billion, followed by Asia with USD 3.7 billion and Europe with USD 1.4 billion. The sectors and structures were well diversified, with deals from the Healthcare, Financials, Technology, Consumer Cyclicals, Utilities and Materials sectors across regions. There were large mandatory deals in the US from KKR and Microstrategy, repeat issues in Europe for Iberdrola and TAG Immobilien, and a USD 2 billion issue in Asia from Baidu, exchangeable into shares of online travel management provider Trip.com.
PERFORMANCE
The Fund lost 1.5% in March, 50 bps behind the benchmark index. Investment-grade credit in EUR fell 0.6%, high-yield lost 1.0%, the MSCI World equity index fell 5.0%, the ITRAXX Xover credit gauge widened 40 bps to 330 bps, the VIX index of volatility rose above 20% and Value outperformed Growth by over 9%. The share basket underlying the benchmark index slipped by 3.5%. This brings quarterly returns to 2.1%, marginally behind the benchmark index return of 2.5%. Volatility contributed, but the equity effect detracted sharply in the face of poor returns for global stock markets. All regions were lower, led by the US (-1.2%) and followed by Europe (-0.2%), Asia (-0.1%) and Japan (-0.1%). Utilities (+0.3%) and Materials (+0.2%) rose, but the other sectors detracted – Technology (-0.8%, mainly in the US), Consumer Cyclicals (-0.3%), Financials (-0.3%, mainly in the US, with positive contributions from Europe and Asia), Communications (-0.2%), Industrials and Pharmaceuticals (both -0.2%, mainly in the US). In Technology, weakness across all sub-sectors in the US (Snowflake, Core Scientific, Seagate, Lumentum, Cloudflare, Salesforce, Datadog) was not offset by gains for VNET Group and Samsung in Asia. Although Alibaba and Trip.com did well in the Asian Consumer Cyclicals basket, Anta Sports and Li Auto detracted, as did Delivery Hero and Accor in Europe and Wayfair in the US. The weakness in cryptocurrencies pushed Coinbase 19 bps lower and the prospect of lower rates led to losses for Goldman Sachs and JP Morgan. Financial services platform Robinhood added 7 bps (we added back exposure mid-month and then sold into strength towards month-end). European heavyweight BNP Paribas also rose. A small gain for Deutsche Telekom was not enough to offset the weakness elsewhere in Communications. In the US, Spotify, Meta Platforms and Netflix detracted. Cellnex in Europe and Tencent in Asia also traded lower. The European defence/aeronautical exposure remains profitable (Rheinmetall, BAE Systems, Rolls Royce, Airbus), but IAG, JetBlue and American Airlines detracted in the passenger airline segment. There was also some profit taking in Siemens after recent gains for German exposure and for Schneider Electric after the unwind in some electrical names due to some dampening in AI enthusiasm.
In relative terms, Technology and Consumer Cyclicals both detracted by 20 bps and Financials by 11 bps. In the Technology sector, the overweights in Lenovo and Xiaomi, the exposure to Core Scientific and the off-benchmark position in Salesforce detracted. In Consumer Cyclicals, some of the recent gainers detracted in March with losses for Alibaba, Delivery Hero and Trip.com, while in Financials, the overweight in Coinbase and the off-benchmark positions in Goldman Sachs and JP Morgan detracted.
OUTLOOK
During the recent market moves, convertible bonds resisted well as many of the main share indices traded lower. Convexity remains positive and the asset class exhibited limited participation in the equity downside in March. Issuance remains strong. We maintain our bias to quality credits and profitable growth companies across sectors, as well as the investments in themes aligned with government policy and our growth outlook for 2025. We have used periods of strength to lock-in profits and periods of weakness to add to exposure. We believe that convertible bonds are an all-weather vehicle which acts as the bridge between bonds and equities and can help investors navigate the markets in turbulent times.
