Like the stock market, price performance has been strong in 2019, with both major convertible indexes on the upswing. The Bloomberg Barclays US Convertible Composite and the ICE BofAML US Convertible index rose 22% year-to-date compared to the S&P 500 and Russell 2000 Growth index’s 28% gain.
Glass First-Half Full
Looking ahead, election years have not favored convertibles.
Equity-linked issuance shrank to post-crisis lows in 2012 and 2016 with $25 billion and $35 billion in volumes, respectively.
The momentum behind equity-linked products and the looming election could make for a manic year. Some expect the second half of the year to be turbulent, said Santosh Sreenivasan, JPMorgan’s head of equity-linked products.
That fear, and perhaps the urgency to raise capital before a potential drop-off, could result in a first-half surge. Sreenivasan expects recent momentum behind convertibles to continue through the first half at least. Osterweis’ Manchuck echoed Sreenivasan. The companies that want or need the capital are likely going to want to tap the market before investor reticence kicks in, he said.
“My hunch is that tech will continue to be active, the way the Nasdaq has been performing. If tech valuations continue to be high that sector will dominate in 2020,” he said. Repeat issuance, which accounted for 58% of deals in 2019 could also drive convertible volumes, Sreenivasan said.
Meanwhile, a slight correction won’t necessarily derail convertible activity, Credit Suisse’s head of Americas equity-linked origination Steven Winnert said.
“Stocks don’t need to be up another 25% next year. There will be a reasonably active convertible market even if stocks are flat to down,” he said.
However, if companies see their stock tank 25%, as some did during the 2018 stock market rout, deals could dry up.