Ready for Market Upticks and Potential Pullbacks

Eli Pars, CFA

• Oil prices, Fed policy, and political uncertainty contribute to a questionable growth outlook for 2024.
• Given these crosscurrents, our focus remains on achieving the best risk/reward profile through bottom-up security selection.
• Convertible issuance remains strong year-to-date, and we expect healthy issuance in 2024 as companies seek to refinance maturing debt across the credit markets.

During the third quarter, stock and bond markets fell into the red by about the same degree. Global convertibles, which blend equity and fixed income characteristics were not immune to these pressures, but provided a degree of resilience, with the Refinitiv Global Convertible Bond Index losing less ground.* In a post-zero interest rate world, we don’t believe we’ve seen the last of simultaneous declines in stocks and bonds. We believe that global convertibles can continue to provide benefits, with active management enhancing the potential of the asset class.

The Fed seems (mostly) done with raising rates, but the market’s obsession with the Fed continues, with investors now fixated on when the Fed will start cutting rates again. But with the economy holding up quite well, it’s hard to see why the central bank would cut rates unless inflation falls below its 2% goal. With oil prices flirting with triple digits, that final drop in inflation may also be pushed out further on the horizon. And that’s before we consider that we have a big election next year. It’s hard to see the Fed wanting to get in the middle of that mess.

All of this combines for a questionable outlook for growth in 2024. This is the point where we remind our readers that we’re not macro traders, just convertible managers. We will stick to our fundamental process and work to get the best risk/reward profile possible. We continue to position Calamos Global Convertible Fund to participate in upside equity rallies while also seeking to manage the downside if the market pulls back. The Fund remains overweight to the US and the technology sector and underweight Europe.

The global convertible market continued to see healthy issuance in the third quarter, and we remain active in the new issuance market. Global issuance totaled $20.5 billion for the third quarter and $60.9 billion year to date, which compares favorably with $39.5 billion in issuance for all of 2022.

Figure 1. 2023 global convertible issuance has proceeded at a healthy pace

Data as of 9/30/23. Past performance is no guarantee of future results. Source: BofA Global Research, ICE Data Indices, LLC.

In prior commentaries, we have discussed the potential for a large uptick in investment grade issuance. During the third quarter, we saw signs that this trend is taking hold, including a large investment-grade oil company domiciled in Italy. According to Bank of America Global Research, 30% of year-to-date issuance has been investment grade, up from 7% in 2022.

Across the credit markets, a large maturity wall is on the horizon, beginning in 2025. As companies begin to address their refinancing needs, we maintain our belief that convertibles will be a popular choice for issuers. We just don’t know whether that will be this year or next. With most potential issuers in quiet periods during the first month of every quarter because of pending earnings releases, we expect October issuance to be low. In November and early December, we’ll see just how motivated companies are to raise capital, but the next leg up in convertible issuance looks more likely to be a 2024 story.