Politics loosens its grip on markets

The parliamentary elections in France resulted in a large majority for Macron and his Republican en Marche party, which gives him a strong mandate to pursue reforms and stimulate the economy.

The snap general election in the UK resulted in a hung parliament with May’s Conservative Party losing its majority. Instead of gaining an anticipated stronger mandate for Brexit negotiations, the UK government now looks fragile at the start of the exit process. US economy data lagged expectations, with manufacturing, retail sales and inflation all softer than expected. The US Federal Reserve continued its tightening cycle, raising interest rates by 0.25%. The European Central Bank signaled that it was more confident on the outlook, viewing less need for monetary easing. This resulted in a strong bond market reaction and an appreciation of the euro at month-end.

With the French elections out of the way, the geopolitical risks overhanging the market have been reduced. The implementation of Emmanuel Macron’s pro-growth policy plans looks more secure as Macron’s centrist parliamentary coalition won more than 60% of the seats in the National Assembly elections in June. The German elections in September will now come into focus. In recent regional German elections, the CDU party of Angela Merkel has been winning. In Italy, early elections could take place in September, coinciding with the German elections.

Growth is expected to continue across all regions. For the European economy, a growth of around 1.5% to 2% is expected. Continued support from monetary policy to the end of this year combined with declining unemployment and an improving housing market should all underpin European markets. Following years of stagnation in European earnings, companies should start to benefit from rising revenues. This, combined with the restructuring which has taken place in recent years, is likely to translate into higher earnings going forward. It is primarily the rise in prices of the underlying shares that should lift convertible returns. For the US, we continue to expect 2 to 2.5% growth, for Japan a growth rate of around 1%, whilst for China we anticipate grow of around 6.5%.

During June, some US$7.3 billion new convertibles were priced. Companies pricing new issues were notable within the European market. Bayer issued an exchangeable bond converting into Covestro, whilst Orange decided to place part of its BT stake in an exchangeable convertible bond. French hypermarket Carrefour and French elderly home operator Korian both came to market. In the US, Liberty issued a convertible into online travel agent Expedia. STMicroelectronics issued two sizeable convertibles whilst Orpar issued a further convertible into Remy Cointreau.

Anja Eijking – Fund manager of the F&C Global Convertible Bond fund – BMO Global Asset Management