Convertible bonds as an alternative
Financial products
Posted by MoneyController on 22.11.2024
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A manager explains his reasons for identifying convertible bonds as an investment strategy that can cope with potential market challenges.
The last two years have been characterised by market growth that has resulted in many indices breaking historical records. This growth has continued into this electionally important year, which saw the victory of Donald Trump in the US elections. Nevertheless, some experts, such as Beat Thoma, CIO of Fisch Asset Management, believe that there are some uncertainties to watch out for.
Among the elements of uncertainty identified by Thoma is the possibility of a thinning of liquidity, due to central bank policy: this effect would - as is normal - arrive months after the trigger, and would only be partly offset by government spending (in the case of the US by the strong deficit spending promised by Trump).
Not only that: the US economic situation may not be as rosy as some of the data portray. In the case of employment, for example, the number of those with more than one job would be increasing on the labour market. In addition, there would also be signs in the markets that should not be underestimated: one of these is the growing enthusiasm of small investors, as opposed to the caution of larger investors, who are more inclined to sell than to buy.
Rather than then investing directly in the stock market, Thoma's strategy is to invest in convertible bonds, products that eventually allow the bond investment to be converted into shares. The pros would be the relatively greater protection offered by bonds and the flexibility of being able to take advantage, at least in part, of stock market rises. Some of the cons, on the other hand, are the often complex structure of these products; the additional commission costs; the dilution of shares (the increase of outstanding shares can lead to a tendency for their value to fall); and the fact that these strategies are precluded to retail investors (except through the intermediation of professionals).
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