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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.

Before investing carefully consider the fund’s investment objectives, risks, charges and expenses. Please see the prospectus and summary prospectus containing this and other information which can be obtained by calling 1-866-363-9219. Read it carefully before investing.

Diversification and asset allocation do not guarantee a profit or protect against a loss. Alternative strategies entail added risks and may not be appropriate for all investors. Indexes are unmanaged, not available for direct investment and do not include fees and expenses.

Opinions, estimates, forecasts, and statements of financial market trends that are based on current market conditions constitute our judgment and are subject to change without notice. The views and strategies described may not be appropriate for all investors. References to specific securities, asset classes and financial markets are for illustrative purposes only and are not intended to be, and should not be interpreted as, recommendations.

Important Risk Information. An investment in the Fund(s) is subject to risks, and you could lose money on your investment in the Fund(s). There can be no assurance that the Fund(s) will achieve its investment objective. Your investment in the Fund(s) is not a deposit in a bank and is not insured or guaranteed by the Federal Deposit Insurance Corporation (FDIC) or any other government agency. The risks associated with an investment in the Fund(s) can increase during times of significant market volatility. The Fund(s) also has specific principal risks, which are described below. More detailed information regarding these risks can be found in the Fund’s prospectus.

The principal risks of investing in the Calamos Global Convertible Fund include: equity securities risk consisting of market prices declining in general, growth stock risk consisting of potential increased volatility due to securities trading at higher multiples, foreign securities risk, emerging markets risk, currency risk, geographic concentration risk, American depository receipts, midsize company risk, small company risk, portfolio turnover risk and portfolio selection risk.

Foreign security risk. As a result of political or economic instability in foreign countries, there can be special risks associated with investing in foreign securities, including fluctuations in currency exchange rates, increased price volatility and difficulty obtaining information. In addition, emerging markets may present additional risk due to potential for greater