Opportunities Amid Diverging Trends
June saw a notable divergence between European and US equity markets. The EuroStoxx 50® Total Return declined by -1.12%, while the S&P 500® Total Return surged +5.09%. Market volatility, as measured by VStoxx®, eased to 17.7% by month-end. Credit risk, indicated by the iTraxx Crossover® (S43), narrowed from 300bps to 283bps.
Convertible Bond Arbitrage
The U.S. market saw a decline in 5-year yields from 3.96% to 3.79% and a decline in HY CDX spreads from 351bps to 318bps. While these developments are positive for convertible arbitrage, CB implied volatility declined sharply over the last three weeks of the month after a large spike in April and May. To a large degree this was driven by an unprecedented $20 billion in new issuance that flooded the market, creating supply-demand imbalances that particularly impacted volatility-sensitive strategies. We anticipate July will serve as a consolidation period as markets absorb this substantial issuance volume, with new deal flow expected to decelerate as companies enter earnings blackout periods.
European convertible activity remained more measured, featuring two notable transactions: a €400 million non-dilutive convertible on Artemis into Kering and an unusually structured 8-year maturity convertible on Legrand. The secondary market maintained a subdued tone with downside bias. Encouragingly, European year-to-date issuance reached €6.5 billion compared to €2.9 billion in the prior year period, signalling renewed confidence in the asset class.
Volatility Trading
Despite renewed geopolitical concerns in the middle east, volatility markets remained largely unmoved, with no material change in either implied or realised volatility. We continue to observe the normalisation of volatility parameters across assets.
The realised-implied spread remained wide, particularly in Europe, reinforcing the cost of long volatility exposure in the absence of catalysts. Risk appetite, though eroding slightly, remained strong, preventing any breakout in volatility levels.
Equity Strategies
Although US markets ended the quarter at record highs, European markets delivered a rather lacklustre performance in June.
Corporate activity appears to be gradually picking up, particularly in the UK mid-cap space, with companies such as Spectris, AlphaWave, and Warehouse REIT showing notable activity. June saw tighter spreads in several merger situations and the successful completion of a few takeovers, including US Steel’s acquisition by Nippon Steel, Fortnox by EQT, and Atacadao by Carrefour.
Looking ahead, we anticipate sustained growth in market activity and are confident about the likelihood of more deal announcements in the months to come.
Credit special situations
In another example of the uptick in corporate activity, BWGI launched a takeover bid for Verallia, which has now been cleared by the AMF in France. The bid targets a minimum 50% ownership stake, signalling BWGI’s strong commitment to expanding its presence in the packaging sector. This move could potentially reshape the competitive landscape and may prompt further consolidation within the industry, a trend we are closely monitoring for further opportunities. For multi-asset managers such as BG, these transactions present attractive risk arbitrage angles in an environment where equity provides limited upside relative to credit.
Trading
On the macro trading side, the main contributor to the rise in gold prices has been the substantial purchases made by central banks. We expect this trend to continue, as emerging market central banks' gold reserves are still very low compared to developed market banks. Moreover, heightened tensions with the US administration are unlikely to recede for countries such as China, which need to reduce their dependence on US assets. Finally, the U.S. administration is showing no willingness to address its substantial fiscal deficit.
Outlook
As we move further into the summer, we maintain a measured outlook and continue to monitor market developments closely. The divergence between US and European equities, along with a gradual increase in corporate activity and stable credit conditions, presents a range of opportunities for our multi-strategy approach. While the environment remains supportive for alternative investments, we remain mindful of potential risks and are focused on careful portfolio positioning to navigate the evolving landscape.
Risk Warning
The views and opinions expressed are the views of Boussard & Gavaudan and are subject to change based on market and other conditions. The information provided does not constitute investment advice and it should not be relied on as such. All material(s) have been obtained from sources believed to be reliable, but its accuracy is not guaranteed. There is no representation or warranty as to the current accuracy of, nor liability for, decisions based on such information.
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Past performance is no guarantee of future results and the value of such investments and their strategies may fall as well as rise. Capital security is not guaranteed.