The recent market fall has brought global convertible bond indices much closer to long-term valuations in terms of delta [sometimes called the hedge ratio]. At the same time, implied volatility remains lower than in previous bursts, offering a potentially appealing way to hedge global equity risk.
With a weighting of around 25 per cent in the technology sector, global convertible bond indices have a long-term tilt towards technology companies. Healthcare, the second-largest sector weighting, comprises around 20 per cent of the indices. And as a natural venue for first funding for some growth companies, the indices are biased towards growth. In the current phase of the US economic cycle, where growth may continue but at a slower pace, growth-oriented sectors could fare well if history is anything to go by. Finally, it is worth noting that the energy sector currently accounts for only 2.5 per cent of the global convertible bonds universe.
For investors willing to remain invested in equities or to re-enter the market, convertible bonds offer the potential for lower drawdowns in periods of market downturn as witnessed in August and December 2015, and since the beginning of this year.
It is not difficult to see that global convertible bonds, while riskier than treasuries, may offer potential upside should sentiment turn positive. Let us not forget that we are still very much in a lower-for-longer environment from a growth standpoint and monetary policy remains broadly accommodative; this could spark a rebound in equity markets. It is also likely that Treasury yields could remain unusually low and offer little upside from here. Global convertible bonds offer investors the ability to benefit from a growth-oriented equity exposure while retaining bond-like downside protection. And for investors unsure about timing the market, this exposure offers a form of automated timing: equity sensitivity decreases rapidly in downturns and accelerates again as markets rebound - delta force.
Antoine Lesné is Emea head of ETF strategy at SPDR ETFs
Key points
* Investors are being forced to contend with volatility once again and markets are hitting low after low
* Global convertible bond indices have a long-term tilt towards technology companies
* Global convertible bonds, while riskier than treasuries, may offer potential upside should sentiment turn positive
