It’s been a wild time in the markets over recent days—between the election, the surge in Covid cases and promising vaccine progress. The election results reassured the markets that, while we remain a divided country, narrow majorities in both houses of Congress will ensure that the more extreme policy changes (widely discussed leading up to the election) will be difficult to enact. Cyclicals and value names have rallied, amid growing indications that the next leg of the market may see a broadening away from big tech dominance. When markets are moving as fast as they have been, a lot of investors get caught up in the noise, which is dangerous. We’re seeing the market cheer for companies that are “improving”—even when improving means moving from extremely toxic to being just bad. Just bad isn’t a reason to invest, though.
The vaccine announcement is fantastic news, but there’s every reason to expect more volatility in the months ahead. With the Senate majority hanging in the balance and the Electoral College vote still weeks away, the political landscape remains tense. We expect fiscal stimulus but the exact parameters of it are “TBD”—and could be subject to considerable wrangling in a divided Congress.
The yield curve has steepened over recent days and we expect it to continue. The Fed is more than willing to lock the front end of the curve exactly where it is. We also believe the Fed will provide as much liquidity as the government needs. Looking longer term, inflation could move faster than some people think, depending on how the next administration approaches issues such as deficit monetization and debt forgiveness.
The world may feel like it’s changing quickly, but as investors the rules are the same: Risk management matters. We’re staying committed to our fundamentally driven, bottom-up approach, and being well compensated for the risks we undertake. In the corporate credit market, that means seeking out companies that are positioned for real fundamental improvements.
The risk of getting whipsawed is as high as I’ve ever seen, and we’re taking a very selective approach to how we are positioning Calamos Timpani Small Cap Growth Fund (CTSIX). Earlier this week, we saw a cyclical rally that swept up some names I’d consider quite toxic—names I wouldn’t want to own in the portfolio. The markets seemed to be looking through the valley to six months forward but were overlooking a lot of nearer term risks. This reminded me of what happened in January of 2001, when the Federal Reserve cut rates unexpectedly, leading to a rally that included some down and out names that were down and out for good reason.
We’re maintaining our overall tilt toward secular growth names that have strong fundamentals. That’s certainly not to say that we are not invested in cyclical positions that can benefit from economic reopening, just that we are doing so on our terms—in a way that’s consistent with our process and focus on higher quality attributes, such as above average earnings growth. That goes back to my first point about avoiding whipsaw risk. Finally, I’d note that even as cyclicals have rallied, secular names are not breaking down on the whole—the market is not telling us to desert secular growth. What we’ve seen is a normal pullback after a period of extraordinarily strong gains for many secular stocks.
Markets are beginning this week feeling upbeat, buoyed by developments on the vaccine development front and election results that point to a divided Washington, D.C. On the vaccine front, this provides the markets with welcomed visibility, and we should celebrate the ingenuity that has brought us here. On the political front, we will be closely watching for how fiscal policy evolves from here, with the hopes that the next four years will bring a moderate economic plan that supports job creation, the health of businesses of all sizes, and an appropriate level of regulation—in sum, making the U.S. a place where capital is treated well.
As discussed in a recent post, GDP numbers and many other data points provide an encouraging picture of a V-shaped economic recovery that may proceed faster than many expected. I believe the news of vaccine progress—especially given the indications of very high efficacy—is a significant catalyst for driving this recovery forward. Of course, while a vaccine is a true game changer, fiscal policy will be key to sustaining the recovery. The U.S. economy and market sentiment continue to benefit from an accommodative Fed, and export and manufacturing orders are moving in the right direction. However, there is still more work to be done. More people still need to get back to work, and businesses need to feel confident about the regulatory and tax environment.
Overall, we believe the case for investing in risk assets—for example, stocks and convertible securities— remains very attractive. A record level of companies are beating earnings expectations. Equity risk premiums and S&P 500 valuations are up, but not to extreme levels on the whole. We’ve seen cyclical stocks perform well, which I believe affirms our investment team’s approach, which has generally focused on including exposure to both cyclical and secular growth.
As the recovery continues and the world makes meaningful strides toward defeating Covid, a very different environment can quickly emerge, with new investment themes gaining strength. We will be in a stock pickers' market--not one that is all about big tech. Security selection and active management will be more important than ever. I am confident that our teams are well-prepared to capitalize on this evolving opportunity set on behalf of our clients, as we have through this unprecedented year.
In closing, I would iterate my earlier guidance—in this environment, it makes sense to maintain a broad level of diversification and long-term perspective. Markets are advancing, but as we’ve pointed out in the past, short-term selloffs and saw-toothed periods are a part of advancing markets, too. I believe investors will be well served by having asset allocations that provide exposure across the market capitalization spectrum, including in small caps that can benefit from sustained economic recovery. Our teams are also identifying many opportunities around the world, including in non-U.S. markets—both developed and emerging.
For more on our teams’ perspectives, see the links in the sidebar, and check back often for additional commentary to see how we are seeking to capitalize on the market landscape with active and risk-aware approaches.
Convertible arbitrage will benefit from any increased volatility from the election. Calamos Market Neutral Income Fund (CMNIX) is currently positioned with 58% allocation to convertible arbitrage, near its highest level in recent years. This is mainly driven by the bottom-up opportunity set in convertible securities. The heavy level of new convertible issuance this year (more than $90 billion in the U.S. through October) has created plenty of opportunity for the arbitrage strategy. And once things settle down post-election, we expect further new issuance in the closing weeks of 2020 and into 2021.
In addition to convertible arbitrage, CMNIX employs a hedged equity strategy, which is also the cornerstone of Calamos Hedged Equity Fund (CIHEX). Our expectation was that we would see a decline in option prices on an implied volatility basis following the election. This has started to happen, but we would expect a further decline as the election results are finalized. The market continues to price in some risk of a delayed conclusion to the election. And with Covid still raging, it is unlikely volatility subsides to pre-2020 levels anytime soon. This should create some interesting opportunities for us to roll out the fund’s hedges into 2021.
We believe convertible securities can provide an excellent way to sleep well and stay invested in the market during volatile times like those in the run up to the recent election (not to mention all the Covid-related volatility). Now that it is looking like a split decision in the U.S. election (Biden win with a Republican Senate), we believe Calamos Global Convertible Fund (CXGCX) is positioned with good upside potential if markets continue rallying while dampening any continued volatility. We continue to find attractive opportunities in the secondary market, as well as in new issuance, where companies have brought more than $130 billion to market through the end of October.
Active management is essential for maximizing the opportunity in global convertibles. In September, we noted that the fund’s equity sensitivity was not out of line with prior periods, although relatively less than the broad global convertible market, as measured by the Refinitiv Global Convertible Bond Index (See “Finding Opportunity In Uncertain Times”). As we continue to actively rebalance the portfolio with the aim of dampening volatility, this continues to be the case.
As the ballot counting continues, it’s understandable that many investors are on edge. However, this is not the time for making rash swings to your asset allocation.
In my post last week, I discussed the importance of staying the course and the dangers of market timing. Investors may see quick rotations in the market as additional election results come in. In fast-moving markets, investors often get caught up in emotion—either fear or greed. Neither serves investors well. And, even after winners are announced, there will be volatility as we learn more about the course of fiscal policy over the weeks and months to come.
Our teams remain focused on long-term fundamentals, and the many different risks and opportunities in the market. These extend beyond the national elections to key propositions in various states that can create tailwinds for individual businesses and sectors. Our teams are also remaining highly attentive to the course of the pandemic and many other global crosscurrents.
Despite whatever movements the markets may make following the U.S. elections, we encourage investors to remember their long-term financial objectives and avoid overreacting to volatility in the short term. That said, fiscal policy has the potential to be a powerful force and can create winners and losers within the financial markets, so it is important to understand the investment implications.
While the ultimate winner of the presidential election and some other races have yet to be determined, we believe the most likely scenario at this point is a relatively divided government as there does not appear to be a sweeping victory for either party. Since results are not final, this can change, but if this holds, it could mean a reduction in extreme tail risks which would be supportive for certain risk assets.
Above all though, we believe this environment will continue to be particularly well suited for convertible securities. Any fiscal policy risk comes at a pivotal point in the global economic recovery and when combined with the unprecedented impacts associated with the Covid virus, it has created a backdrop that is ripe for heightened volatility in financial markets. However, just as the unexpected events of this past year have reminded us—we continue to believe the flipside of volatility can be opportunity.
We remain encouraged by the investment toward a vaccine and anticipate pent-up consumer demand once we move past the worst of the virus concerns. We also have extremely accommodative global monetary policy, and although this cannot fix the economy by itself, it can buy time as the economy recovers. In addition, there are underlying secular trends that we believe will endure regardless of whatever fiscal policies are implemented.
The hybrid nature of convertibles, which combine the upside potential of equities with downside risk mitigation in the form of a fixed income component, creates an asymmetric risk/reward profile that can help navigate the volatility and capitalize on opportunity. Convertibles have historically been a preferred source of capital for growth companies and once the policies are understood, we expect issuers to continue to look to convertibles as they take advantage of future growth plans. The convertible market is expanding, we see very attractive supply/demand dynamics and we are excited about the potential benefits of an actively managed convertible strategy in these unique times.
We continue to position Calamos Growth and Income Fund for a transitional and volatile macro environment, but with expected positive risk asset returns. The path of the economy and risk assets will be determined by many factors, including the pace of Covid spread, the development of effective vaccines and treatments, the pace of the economic growth in this re-opening environment, as well as monetary and fiscal policy.
Our view of many of these factors remain the same since we shared our thoughts in September (see the paper, “Finding Opportunity in Uncertain Times”), providing a positive but volatile path forward: the virus spread remains highly variable, an effective vaccine should be widely available sometime in 2021, the economic recovery moves forward but at a slower pace until there is a vaccine and then accelerates back to a more normal level of economic activity, and monetary policy should remain very accommodative.
At the time of this writing, we have yet to see the final results of the U.S. elections, but our previous base case of a divided U.S. government and the passage of additional fiscal spending bill both seem reasonable. We will continue to monitor this situation and will adjust our view accordingly.
The Calamos Growth and Income Fund Growth is actively utilizing a combination of equities, convertible securities and options to manage downside risk while positioning for a positive equity return environment. We believe the use of convertibles and options are effective tools in dampening downside volatility. In terms of positioning, we favor growth areas of the equity market (information technology, consumer and healthcare) with longer-term, sustainable cash flow generation characteristics. We also have cyclical exposure for our economic recovery and effective vaccine base case, which should favor companies that can rapidly grow cash flows from depressed bases. We have taken a laddered approach in these economic recovery areas, owning some areas that are currently recovering and other areas in which recovery will take longer. We continue to utilize convertibles in many higher-risk areas of the market, including more aggressive growth companies as well as deeper cyclical areas, seeking to provide positive asymmetric returns in lower-risk structures.
As we wait on final results, it is looking like we will have a divided government with a Democrat-controlled White House and House of Representatives, and a Republican-controlled Senate. The markets typically prefer gridlock, which is at least partly why we are seeing a rally in the stock market today. The lack of a “blue sweep” means large tax hikes are off the table which, in isolation, will support corporate earnings and stock price valuations. Additionally, the divided government will likely result in a smaller fiscal stimulus package, which will likely keep inflation and interest rates low. Lower inflation and interest rates is negative for value sectors like energy, materials, and financials and positive for growth sectors like technology and health care.
A Biden administration would likely result in less political tension with China, which could be positive for certain U.S.-listed Chinese ADRs and certain semiconductor related companies with direct and indirect exposure to China. Additionally, the lack of a blue sweep is an incremental negative for alternative energy companies with exposure to solar and wind power.
Regardless of election results, just getting clarity on those results is a positive driver for the stock market. Investors were extremely nervous about the election, thus, a lot of hedging was used ahead of the election. We are now seeing some of that hedging get unwound which adds buying pressure to the overall stock market.
We believe opportunities in emerging market equities represent a compelling counterpoint to the fear and uncertainty pervading many developed markets due to political unknowns and rising Covid-19 cases. Since the market bottom in March, emerging market equities have outperformed their developed market counterparts. The MSCI Emerging Market Index has risen 48.3% from March 24, 2020 to October 31, 2020, versus a gain of 40.8% for the MSCI World Index. Many Northern Asian countries, including China, Korea and Taiwan have contributed to this outperformance.
As we have discussed over recent months, the case for emerging markets is supported by a variety of factors—including the “first in, first out” experience of the pandemic in China and the rest of Emerging Asia, as well as societal forces that have allowed for swifter containment of Covid cases. (Our recent paper, “Sustained Tailwinds for Global Risk Assets,” covers these topics at greater length.) Additionally, we believe that non-U.S. markets and emerging markets in particular, can benefit from the continued tailwinds of a weak dollar environment although selectivity remains key. For more on this, see our post: “Cyclical Themes: Outlook for a Weaker Dollar.”
In terms of portfolio positioning, our views are reflected in our ongoing investments both in industries that are benefiting from continued secular tailwinds, as well as in more cyclically tilted industries that we expect to benefit from the upcoming inventory restocking cycle and reflationary tailwinds. We believe this barbell approach, which reflects our top-down and bottom-up insights, will aid us in capitalizing on the opportunities that exist in the months and quarters ahead.
Past performance is no guarantee of future results. Source: Bloomberg. The MSCI Emerging Markets Index is a free float-adjusted market capitalization index that is designed to measure equity market performance of emerging markets. The MSCI World Index is a market capitalization weighted index composed of companies representative of the market structure of developed market countries in North America, Europe, and Asia/ Pacific region. The Refinitiv Global Convertible Bond Index is designed to broadly represent the global convertible bond market. Indexes are unmanaged, do not include fees or expenses and are not available for direct investment. The S&P 500 Index is considered generally representative for U.S. large cap stocks.
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.
Convertible securities entail interest rate risk and default risk.
Source for convertible market data: BofA Global Research
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 the potential for greater economic and political instability.
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 1-800-582-6959. Read it carefully before investing.
Important Risk Information-All Calamos Funds. 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 Growth and Income Fund include the potential for convertible securities to decline in value during periods of rising interest rates and the possibility of the borrower missing payments; synthetic convertible instruments risks include fluctuations inconsistent with a convertible security and components expiring worthless. Others include equity securities risk, growth stock risk, small and midsize company risk, interest rate risk, credit risk, liquidity risk, high yield risk, forward foreign currency contract risk, and portfolio selection risk.
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. 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 economic and political instability in less developed countries.
The principal risks of investing in the Calamos Market Neutral Income Fund include: equity securities risk consisting of market prices declining in general, convertible securities risk consisting of the potential for a decline in value during periods of rising interest rates and the risk of the borrower to miss payments, synthetic convertible instruments risk, convertible hedging risk, covered call writing risk, options risk, short sale risk, interest rate risk, credit risk, high yield risk, liquidity risk, portfolio selection risk, and portfolio turnover 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 economic and political instability in less developed countries.
The principal risks of investing the Calamos Hedged Equity Fund include: covered call writing risk, options risk (see definition below), equity securities risk, correlation risk, mid-sized company risk, interest rate risk, credit risk, liquidity risk, portfolio turnover risk, portfolio selection risk, foreign securities risk, American depository receipts, and REITs risks.
Options Risk—the Fund’s ability to close out its position as a purchaser or seller of an over-the-counter or exchange-listed put or call option is dependent, in part, upon the liquidity of the options market. There are significant differences between the securities and options markets that could result in an imperfect correlation among these markets, causing a given transaction not to achieve its objectives. The Fund’s ability to utilize options successfully will depend on the ability of the Fund’s investment advisor to predict pertinent market movements, which cannot be assured.
The principal risks of investing in the Calamos Timpani Small Cap Growth 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, and portfolio selection risk. The Fund invests in small capitalization companies, which are often more volatile and less liquid than investments in larger companies. 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 economic and political instability in less developed countries.
NOT FDIC INSURED | MAY LOSE VALUE | NO BANK GUARANTEE