MARKET COMMENTARY
The first half of 2026 proved to be particularly turbulent, although investors largely managed to look through the noise and there were numerous opportunities to exploit price gaps, lock-in profits and reposition for the next leg of the rally. The market was narrow and volatile, dominated by unfavourable geopolitics, and fear and excitement in equal measure over the trajectory of the AI trade. The only thing that appears certain is that nothing is certain; which parts of the AI value chain will perform, will the truce in Hormuz weather the storm, where are interest rates likely to be at the end of the year, will the recent rotation gain traction or fade in the face of the inexorable rise of the AI-machine. Uncertainty breeds volatility which benefits convertible bonds. Issuance remains on track for a record year, performance has been compelling against other asset classes, and we have seen a broadening of performance towards Europe and Japan from the US and Asia, underlining the truly global reach of the product.
After the turbulence of March came April’s rebound. Amid hopes of de-escalation in Iran and the recovery of the AI complex, global convertibles staged their sharpest monthly rally on record. The main US indices outperformed European peers in April. The tech-heavy Nasdaq gained 15%, posting its best month since 2020. Asian stocks also bounced sharply in April, reversing double-digit losses in March. Enthusiasm for chipmakers and exposure to the AI value chain boosted the tech-heavy benchmarks in South Korea and Taiwan. The Federal Reserve (Fed), Bank of Japan (BoJ) and the European Central Bank (ECB) all remained in wait-and-see mode, debating a hike but ultimately opting to hold rates steady. Macro data continued to point to growth but with inflation, US employment data reports were robust (jobless claims, the unemployment rate and average hourly earnings) and Chinese manufacturing and non-manufacturing data for April did not disappoint.
Global stock markets continued to rally in May. Gains were driven by a strong earnings season and continuing support for the AI complex with a healthy dose of the fear of missing out (FOMO). President Trump announced that a truce was “largely negotiated” as the month drew to a close, only for hostilities to resume. It was another excellent month for investors with most major indices firmly in positive territory, especially those with AI or semiconductor exposure. This was despite fairly heavy news-flow, rising global yields, higher inflation and the realisation that the somewhat unloved rally has been highly concentrated. The S&P 500 hit record closing highs on half of all this month’s trading days. The fear of potential “AI froth” spurred some rotation towards Value names late in the month. Japanese Q1 GDP grew 2.1% annualised versus +1.7% forecast and there was a clear rebound in consumption. China May CPI came in in-line at +1.2% year-on-year, but PPI rose 3.9% on higher energy, chip and non-ferrous metal costs. The gap between CPI and PPI is now the widest since June 2022.
June started with a US jobs report that weighed on equities and propelled yields higher. The blowout number essentially put to bed any hopes of rate cuts in 2026 as Kevin Warsh took over as Chairman of the Federal Reserve, setting a rather different tone to that of his predecessor. There will be less forward guidance with markets expected to digest events without viewing them in the context of how the Federal Reserve is likely to react as a consequence. The June committee was a somewhat hawkish get together and US borrowing costs may also rise as traders start to demand a higher rate premium to offset increased rate-setting unpredictability.
Elsewhere, SpaceX successfully launched the largest ever IPO, ASML became Europe’s most valuable company of all time, gold plunged to 6-month lows, the Bank of Japan raised rates to a 31-year high, UK Prime Minister Keir Starmer resigned, and Bitcoin hit a 20-month low.
Volatility continues to simmer gently; after hitting 30 in March and closing April below 20, there were a number of peaks in the VIX in June before a calmer month-end. Credit spreads are back to mid-2025 levels with the ITRAXX Xover credit gauge tightening from March wides (360bps) back to 300bps at quarter end.
Convertible issuance has been buoyant but hyperscaler capex is spurring the US technology behemoths to print huge tickets in the debt market including a jumbo mandatory deal for Google owner Alphabet. The AI space remains firmly Darwinian (only the strongest will survive) and there was notable weakness after a disappointing report from Broadcom and more general profit taking after a substantial winning streak. Micron soon came to the rescue by reporting a 15-fold surge in quarterly profits but the sell-off returned. The AI road will not be without the odd pothole but it remains to be seen if a deeper, full-blown rotation is really on the cards.
NEW ISSUANCE
Year-to-date global issuance reached USD138bn, of which USD84bn was issued in Q2 and USD45bn in June alone, shattering the previous monthly record. The US led the way in Q2 with USD63bn, followed by Asia with USD11.5bn, Europe added USD7.2bn and Japan, USD2.3bn equivalent. Despite the heavy issuance calendar, bonds are clearing – some of the larger preferreds ended up in the hands of equity income funds and ETFs.
There were benchmark sized deals in all regions this quarter, but the US dominated. There were sixteen deals/tranches over USD1bn. June’s volumes especially were heavily driven by the AI infrastructure theme as Alphabet, Super Micro and Ciena all sold new bonds. Alphabet raised USD19.3bn via mandatory preferreds as part of its wider USD85bn capital raise. European primary has lagged the US and Asia for some time, but this quarter there were a number of new deals; Schneider Electric, K+S AG, RAG Stiftung (Evonik), ST Microelectronics, AT+S AG, Orpar (Remy Cointreau), Vonovia and Veolia.
PERFORMANCE
Convertible performance was strong in Q2 and convexity played its part during periods of weakness. The Fund gained 12.5% over the quarter against a benchmark return of 8.0%. Over the same period, the MSCI World index rose 13.5%, high yield added 2.4% and investment grade credit traded 1.0% higher. All regions were positive; the US was the stand-out performer +7.5%, Japan gained 1.9%, Europe rose 1.8% and Asia added 1.3%. Although the ongoing rotation boosted Industrials (+1.1%) and Pharmaceuticals (+0.7%), Technology still dominated (+11.1%).
The US Pharmaceuticals added 0.7% with gains for Jazz, Halozyme, Ligand, Cytokinetics and Lantheus. In Industrials, performance was largely concentrated in the US (Bloom Energy) and Europe (Schneider Electric, Lufthansa, Legrand).
Gains for the Technology names were spread across regions; in the US (+6.2%) Nebius, Palo Alto, Snowflake, Seagate, ON Semiconductor, Vishay Intertechnology; in Asia (+2.1%) Lenovo, Wiwynn, SK Hynix, Zhen Ding and Samsung Electronics; in Japan (+1.9%) Taiyo Yuden, Ibiden, Rohm and Advantest; in Europe (+0.9%) where the sector is starting to gain traction, STM, ASML, Aixtron and AT+S. Basic Materials detracted by 0.2% (Albemarle, First Majestic, Zijin Mining and China Hongqiao were all weaker). The Asian consumer cyclicals continue to underperform (Alibaba and Trip.com).
All regions were also positive in relative terms; Japan +154bps, the US +124bps, Asia +87bps and Europe +85bps. The strongest sector performance came from Technology +516bps; the overweights in Seagate, Palo Alto, Nebius and Macom in the US as well as the underweight in Strategy; the overweights in ASML, STM and AT+S in Europe; the overweights in Taiyo Yuden, Ibiden and Advantest in Japan and the exposure to Wiwynn, SK Hynix and Samsung Electronics in Asia. Energy also did well (overweight Solaris and underweight Energy Fuels and Yankuang Energy) as did Pharmaceuticals (overweight NeoGenomics, Indivior, Halozyme and Mirium in the US and Wuxi Apptec in Asia).
Basic Materials detracted by 28bps (overweight Zijin Mining and China Hongqiao in Asia, overweight JX in Japan, overweight Albemarle in US not offset by +5bps from the overweight in Aurubis in Europe). Consumer Cyclicals detracted by 19bps with weakness in Asia and the US (Alibaba, Trip.com and the underweights in Rivian, Etsy and the Cheesecake Factory) which was not fully offset by a +15bps contribution from Delivery Hero in Europe.
OUTLOOK
Convertible bonds have generated attractive risk adjusted returns so far in 2026. Global convertibles have done better than equities and fixed income. The new issue market continues to add new names to the universe and convexity played its part during periods of equity market weakness. We remain constructive on the potential of the asset class to continue to generate strong performance in H2.
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