Convertible bonds: the weather forecast for 2023

Convertible bonds are an all-weather instrument. The optionality embedded in this asset class helped returns and provided a cushion during the challenges of the past two years. Looking into 2023, we expect equity markets to remain challenging but do not foresee a rise in defaults for convertibles. In our view, they offer an effective way to navigate an uncertain macro environment because they participate in any equity upside while still providing downside protection. At LOIM, we offer a broad range of strategies for investors wishing to gain exposure to global convertible bonds.

Key points in our 2023 outlook include:

• Growth differentiation. Sharply rising interest rates and record inflation affected the performance of the asset class over the past two years. Growth companies, which make up a large part of the convertibles universe, suffered in this environment but we believe that certain names can recover. We differentiate between funded ‘quality’ companies generating excess economic returns and ‘unfunded growth’ names that could continue to underperform
• Preferred themes. Looking into 2023, there are a number of investment themes and opportunities for convertible bond investors. Inflation has peaked and rate rises could slow although borrowing costs are likely to remain higher for longer. The themes we prefer include: pricing power in an inflationary environment, defensive names with growth potential, insourcing of systemically important industries in the wake of last year’s supply-chain woes, and security – especially of food and energy
• Track record. Our flagship strategy has been in existence longer than almost any other global convertible product. Our experienced team has a successful track record of generating risk-adjusted returns over the longer term with a defensive management style and a bias to higher quality credits

To read more, please access our 2023 convertibles outlook by using the download button provided.

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