MFM Convertible Bonds Opportunities

What happened
Economic fundamentals continued to deteriorate in the early fall. The manufacturing sector, in particular, experienced a severe contraction. The services sector however, continues to support the economy in most regions, as a globally robust labour market sustains healthy consumer spending. The first signs of a weakening of the service sector have popped up recently. Therefore, consumer sentiment is one of the most critical indicators in the short-term. In this environment, the outlook for global growth continues to be revised downward. Concurrently, the risk of a recession continues to increase.
Inflation, which remains strangely moderate, has allowed central bankers to implement accommodating policies. These policies reduce the risk of an imminent recession. Although many economists have recently pointed out that monetary policy alone can no longer sustain growth. A global strategy seems inevitable. Indeed, with the possible exception of the United States, most central banks have exhausted their monetary policy options. In the subsequent phase of support, central bankers will have to be backed by governments with tax stimulus plans.
Despite so-called encouraging rumors about the trade war between the United States and China, there are more taxes in place today worldwide than a few months ago. Furthermore, the scenario of a favorable resolution in the short term seems unrealistic.
In the balanced convertible bonds universe (using Thomson Reuters Global Focus indices), Japan showed the best performance at +0.90% followed by Asia-Ex at +0.49% and Europe at +0.35%. US lagged behind at -0.67%. Thomson Reuters Global Focus returned -0.06% while its sub-index investment grade returned +0.39%.

MFM Global Convertible Bonds (CHF-I class) returned -0.04% against its benchmark at +0.37%.
The relative performance is explained by our selection in the US, underweighting poor credit quality, and our position in Aabar/Unicredit (Other, Financials).
In absolute terms, our allocation in Europe, Asia-Ex and Japan contributed positively this month. However, our allocation in the US and in Other costed us the most.
In the portfolio, we exited Aabar/Unicredit (Other, Financials) as the company received an adverse opinion in the auditors’ report and following our internal selling-rules. We have been active in new issues: Ubisoft (Europe, Communication Services), Etsy (US, Consumer Discretionary) and MTU Aero Engines (Europe, Industrials). Finally, we have also built a position in the new Argentum/Wirecard (Europe, Information Technology).

MFM Convertible Bonds Opportunities (EUR-I class) returned -0.23% against its benchmark at -0.03%.
The relative performance is mainly explained by our selection in US, mainly being not exposed to Tesla, and our position in Aabar/Unicredit (Other, Financials), under pressure due to an adverse opinion in the auditors’ report and that we sold to cut the risk following our internal selling-rules.
On an absolute performance, Japan and Europe contributed positively this month. However, our allocation in the US costed the most in September.
In the portfolio, we have been taking profit on our gamma satellites which became too equity sensitive: NXP Semiconductors (Europe, Information Technology) and Larsen&Toubro (India, Industrials). We reinvested the profit in new positions for our prospectus satellite: Cellnex Telecom (Europe, Communication Services) and LEG Immobilien (Europe, Real Estate).

What's next
The developments in the trade war negotiations will dictate the short-term performance of many asset classes, especially those most exposed to trade. For equities, an improvement in earnings growth prospects is necessary to initiate a sustainable rebound. This seems unlikely, in an environment that remains uncertain about tariffs. In these conditions with limited visibility, the management of companies typically tends to alter their growth outlook.
In the medium term, the risk of a recession, although increasing, remains tolerable. We therefore maintain a cautiously positive positioning in terms of exposure.
In this environment, repeated interventions by central banks have allowed some companies to obtain financing at moderate costs without making them valuable investment opportunities. An active management, based on the quality of the fundamentals, should help to mitigate these risks and allocate capital efficiently. As a prediction of developments in the US-China trade war remains a divinatory art, we maintain a defensive and diversified approach by focusing on the quality of the underlying assets. This should allow our strategies to weather the likely erratic market moves of the main asset classes.