Global Convertibles: Staying Focused on Fundamentals Amid Signs of Economic Slowdown

Eli Pars, CFA

• The US economy has been resilient in the face of rising rates, but plenty of data suggests a slowdown is likely.
• We’ve got a healthy degree of skepticism that the stock market can rip further from here, but we’re confident we can continue to find opportunities in global convertibles, guided by our focus on fundamentals.
• Although we can’t predict if it will be this year or next, we continue to expect a ramp up of investment-grade convertible issuance on the horizon.

It’s easy to forget that a year ago rate increases were just starting to pick up. On June 15, 2022, the Fed surprised the market with a 75 basis point hike bringing short-term interest rates to 1.5%. This was the first of what would become four consecutive 75 basis point hikes. So, we are just getting to the one-year mark for rates rising to levels that start to bite.

To date, the economy, especially the labor market, has been remarkably resilient. But that may be starting to change. The four-week moving average of jobless claims is said to be the most accurate predictor of the labor market, and it has been going almost straight up for nine months, albeit from a low base. Other signs of a pending slowdown include contracting money supply (M2), a yield curve that has been inverted for a while, some survey data, and some bodies floating to the surface (e.g., Silicon Valley Bank).

In the face of what looks like a pending slowdown at minimum, it’s tough to see stocks ripping … except for the fact that most of this has been known for a while. And the stock market (or at least mega-cap tech) has been ripping. Luckily, we’re not macro traders, just convertible managers. We will stick to our fundamental process and work to get the best risk/reward profile we can.

The global convertible market continued to see a recovery in new issuance in the first half of 2023. Year-to-date through June, global issuance total issuance totaled $39.3 billion, already in line with the $39.5 billion issued in calendar year 2022.

We remain active in the new issue market, which helped us keep Calamos Global Convertible Fund (CXGCX)’s risk level in line with the market. We continue to position the fund with the aim of participating in any upside rally while mitigating downside if the market pulls back. The fund continues to be overweight to the US and the technology sector and underweight to Europe.

In recent commentaries, we’ve written about the potential for a large uptick in investment-grade issuance, and we’re excited to see that trend begin. In terms of when this trend ramps up in a big way, we just don’t know if it will be this year or next. We continue to hear that treasurers find the coupon savings of a convertible compelling but they are reluctant to be the first among their peers to issue a convertible. As the large maturity wall (which starts in 2025) across the credit markets gets closer, we believe it will give issuers the courage to move forward.