The festive season was more turbulent than expected, with rates, tariffs and politics all to the fore. Most US stocks closed December lower following the post-election rally in November. The Nasdaq resisted better than most, supported by a strong performance from Big Tech, but the Russell 2000 sharply underperformed, giving up much of November’s gains, and the equal-weighted S&P also underperformed the official index. The December Federal Open Market Committee (FOMC) meeting led to investor nervousness, despite the expected 25 bps rate cut. The subsequent statement was more hawkish than expected, with an important addition to rhetoric – the committee will closely monitor the “extent and timing” of additional moves. The US economy remains strong after 100 bps of cuts in 2024, but median expectations are now for just two cuts (50 bps in total) in 2025, the result of higher inflation forecasts if incoming President Trump makes good on early policy announcements. 2-year yields jumped and the S&P500 saw its biggest daily decline on rate decision day since 2001. This led to a significant spike in volatility. Bitcoin traded up through USD 100,000 before giving up some gains into year-end. Microstrategy shares also weakened after registering a stratospheric rise up to late November.
In Europe, December was another month of mixed performance for the main equity indices. There was weakness in the UK and Spain but gains in Germany, France and Italy. The European Central Bank (ECB) cut rates by 25 bps as expected, although the tone was less dovish than hoped, and the Swiss National Bank (SNB) surprised markets with a 50 bps cut. France was again thrown into political turmoil early in December when Michel Barnier’s government was toppled after the first successful no-confidence vote since 1962. President Macron finally named veteran centrist Francois Bayrou as the new Prime Minister, restoring stability. Later in the month, the German government also fell victim to a no-confidence vote called after the three-party coalition broke up. Elections are due to be held on 23 February, with the right-wing CDU predicted to win. Germany has been stagnating and narrowly avoided recession in 2024. Relaxing the constitutional debt brake could make room for much-needed public investment.
In China, two major policy meetings in December clearly set the stage for further stimulus. We expect GDP growth to hit 4.5% for 2025 with a higher deficit target and looser monetary policy for the first time in 14 years. We expect the government to allow the CNY to weaken as tariffs loom.
The political turbulence was not confined to Europe. In South Korea, President Yoon Suk Yeol declared martial law and was subsequently impeached. A tragic air crash with significant loss of life ended a difficult month for one of Asia’s key economies.
NEW ISSUANCE
Global convertible bond issuance amounted to USD 12 billion in December, with the majority from US issuers driven by software and crypto-linked companies. Global volumes in 2025 exceeded forecasts at USD 119 billion, the largest annual supply since 2021. There was one deal each in Europe, Asia and Japan last month, with activity dominated by the US, where 19 borrowers came to market. The refinancing trade was in full swing, with new convertibles from Live Nation, Bill.com, Nutanix, Datadog and MP Materials.
PERFORMANCE
Convertible bond performance slowed in December, partially erasing November gains. The asset class nevertheless did well in 2024, participating in the strong performance of the broader equity markets, outperforming credit and even its own underlying equities. The Fund lost 1.9% in December, in line with the benchmark index, for a full-year gain of 6.1%. In December, investment grade credit in EUR fell 1.3%, high yield lost 0.6%, the MSCI World EUR slipped 2.0%, volatility rose, the ITRAXX Xover credit gauge traded marginally wider and Growth outperformed Value. Equity and rates detracted, while credit and volatility were neutral and income contributed. By region, the US fell 1.9% and the other regions were largely flat. All regions were also mainly flat in relative terms. Most sectors were negative, with the main weakness in Utilities -0.4%, Financials -0.3%, Technology -0.2% and Real Estate -0.2%. The weakness in Utilities was concentrated in the US, with losses for Southern Energy, NextEra Energy, Duke Energy and CMS. The underweights in WEC, First Energy, PPL, Evergy and Alliant generated relative gains. In Financials, our Asian exposure generated gains (Ping An, SBI Holdings, Far East Horizon) but US exposure detracted. The weakest performance came from crypto-linked name Coinbase, whose shares fell 16% in December, in line with the broader cryptocurrency weakness. Shift4 Payments, JP Morgan and Global Payments also detracted. US Technology was also weak, with losses for Snowflake after disappointing quarterly results published in November, while Zscaler and Core Scientific suffered after the crypto sell-off. In Real Estate, the US names were again the main detractors, with losses for Welltower Inc, Digital Realty, Ventas and Zillow on concerns that US rates may not fall as far or as fast as expected.
OUTLOOK
We expect positive returns for global convertible bonds in 2025 after a strong year for the asset class in 2024. We remain aligned with government policy in the US and China, as we believe that names which benefit from policy support or stimulus will do best. Volatility contributed to returns in 2024 after detracting in 2023 and we forecast that the current geopolitical situation, rates backdrop and Donald Trump’s return to the White House could lead to higher volatility in 2025. There is likely to be only marginal credit tightening, but defaults should remain low. Equity market performance remains highly concentrated, but in the current environment, quality growth names should generate attractive returns; these companies make up a significant part of the convertible bond universe and offer diversification for investors wishing to participate in the equity upside but with the protection of the bond floor.