Chinese internet companies are behind the most interesting convertible bonds issuance of the moment, offering a 'unique exposure' to the global market for this asset class.
While these convertible boonds offer access to booming chinese technology stocks, valuations vary significantly, which is why Esposito is sitting on the sidelines for the time being.
‘We've yet to have a clear assessment of the valuation for these companies, which in some cases amount to about thirty times their earnings,' Esposito told Citywire Global.
Pointing to the attractiveness of the asset class over holding Chinese equities, he said:
'An ordinary equity investor would have to manage a volatility of 60-70%, but the nature of convertible bonds can help to substantially reduce the volatility of these securities.’
According to the convertibles manager, some of these companies, which have issued convertibles on the US market for two billion dollars in November, offer a service that integrates Twitter, Facebook, Instagram and Amazon on a single platform.
Issuances worthy of note include the "Twitter of China" Sina Weibo, and the online travel agent Ctrip.
'Their capacity for growth, is substantial both for the rapid growth in the number of users and for their management models.’
Waking up to convertibles
2013 has also seen an increase in the issuance of convertibles by Italian companies. As the Neapolitan manager points out, this can be seen as a hint of an undergoing evolution in the peripheral European market.
‘Italian investors have never been very versatile with this product, because historically Italian companies were very reluctant to issue convertibles.'
'This year, as a result of the financial crisis in Europe, and as a consequence of the fact that banks are less willing to lend to companies, we have seen a significant increase in Italian convertibles.'
The most important Italian issuance of the year, Esposito said, was Telecom Italia's, which has issued 1.3 billion euros worth of mandatory convertible bonds in November.
Other issuances worth mentioning were (Italian oil and gas giant) Eni, which issued various convertibles such as an exchangeable bond on Snam (a natural gas infrastructure company), and Camfin, which issued an exchangeable in Pirelli to solve the cross-holding issue between the two companies.
‘These issuances are interesting from a portfolio construction point of view, because they allow exposure to the European peripherals market, which is particularly desirable at this time. We have recently increased our exposure to Italy, Spain and Portugal.’
'Sweet spot' for convertibles in 2014
2014 will be a good year for convertibles, Esposito assures. With tapering expected to happen in the first half of next year, this asset class will be best positioned to withstand volatility and interest rates appreciation, according to the Bluebay manager.
'With interest rates expected to increase when the Fed starts tapering, the resulting rise in equity prices - reflected in an incremental rise in the price of convertibles, given their convexity - will allow this asset class to generate positive returns.'
'We believe convertibles will be in a sweet spot in 2014, as equity is not subject to the same degree of risk aversion that we are seeing in the straight bond market, and therefore has much more room to continue to appreciate and remain more attractive than fixed income.'