Real Assets Rising: When Safe Havens and Risk Assets Rally Together
Equity markets in Europe and the US were up in September with the EuroStoxx 50® Total Return at +3.40% and the S&P500® Total Return at +3.65%. The market implied volatility measure VStoxx® moved lower, finishing the month at 16.7% with the iTraxx Crossover® (S43) also down at 240bps.
Macro Trading
The Federal Reserve's September rate cut to 4.0–4.25% marked a pivotal shift in monetary policy, driven by labour market deterioration despite persistent above-target inflation. This decision underscores the Fed's delicate balancing act between supporting employment and maintaining price stability.
Market dynamics revealed interesting cross-asset themes in traditionally uncorrelated asset classes, with traditional safe havens like gold reaching new highs alongside equity markets, commodities and Bitcoin. This simultaneous appreciation across asset classes suggests underlying monetary considerations may be influencing investment flows toward real assets. In fact while stock markets are at all-time highs, relative to gold, over the past decade equity markets appear remarkably flat, indicating potential currency debasement effects on nominal valuations.
We increased our gold exposure in August ahead of Jackson Hole to hedge against potential monetary debasement. Despite the significant gains in September, medium-term support for gold remains strong from retail demand and emerging market central banks.
With further rate cuts and fiscal stimulus likely on the horizon we anticipate sustained momentum in real assets.
Equity Strategies
In the risk arbitrage portfolio, several spreads widened as renewed antitrust scrutiny impacted crowded trades. Covestro was notably under pressure due to delays at the European Commission, which launched an in-depth investigation into foreign subsidies related to its takeover, leading to a tight timeline for regulatory approval. The spread between Saipem and Subsea widened as well, as the Brazilian antitrust authority began its investigation.
On a positive note, several deals successfully closed during the month, including the Canal+ acquisition of Multichoice and BMPS's takeover of Mediobanca, demonstrating that well-structured deals continue to navigate the regulatory environment effectively. These closures provided positive momentum for arbitrage strategies and reinforced confidence in deal execution capabilities.
The broader M&A environment remains constructive, with corporate activity maintaining robust levels, especially in the US. Large-scale transactions continue to emerge, including significant private equity-sponsored buyouts such as the $50bn acquisition of Electronic Arts, indicating sustained appetite for transformative deals. This momentum is expected to broaden geographically, with increased activity anticipated across international markets as corporate consolidation themes gain traction and financing conditions remain supportive of strategic transactions.
Convertible Bond Arbitrage
This month marked the successful conclusion of our three-year investment in the Siemens Energy 5.625% mandatory convertible bond. Our fund maintained a substantial position as one of the main institutional investors in this €960 million issuance which exemplified the dynamic nature of convertible securities during periods of exceptional market volatility. Throughout the holding period, Siemens Energy's underlying equity experienced remarkable price movements, fluctuating from €23 per share down to €9 before ultimately reaching €100 at expiration. This extraordinary volatility presented both significant challenges and opportunities that required continuous portfolio management expertise.
Our investment thesis was validated through disciplined risk management protocols and dynamic hedging strategies that we implemented and adjusted throughout the three-year period. By maintaining appropriate delta hedging and gamma management techniques, we successfully captured the embedded optionality while protecting against downside exposure during the stock's most volatile phases.
More broadly, European convertible markets presented a challenging environment, with declining realised volatility leading to compressed implied volatility levels across the region.
The primary market remained subdued, featuring three new issues totalling €1.6bn. Activity included repeat issuers Lufthansa and Schneider Electric, alongside newcomer Exail Technologies, an innovative French defence company specialising in marine robotics systems.
Asian markets, and Hong Kong in particular, were especially active during September. Notable new issues included those from established names such as China Pacific Insurance, Alibaba Group, and MMG Limited. We anticipate continued momentum in this region as Chinese regulatory authorities encourage large corporations to access international capital markets, helping to alleviate pressure on domestic financing channels and creating attractive investment opportunities for our portfolio.
On the surface, the U.S. convertible bond market appeared calm with 5-year Treasury yields rising 4bps, from 3.70% to 3.74%, and HY CDX declining 1bp, from 322bps to 321bps. The S&P 500's impressive 3.5% rally, led by Magnificent Seven technology stocks, catalysed robust primary market activity with 25 new convertible issues totalling $16 billion. Many of these deals were increased in size and priced at the rich end of the indicated terms due to strong demand. This demand came from both long-only funds that have had a strong directional YTD performance and from hedge funds which are also enjoying good performance this year.
Volatility Trading
Markets remained bullish, supported by the Fed’s rate cut and expectations of further easing and accommodative fiscal policy. Risk premia compressed, realised volatility remained subdued, and implied volatilities decreased. In this context, long gamma positions were costly, but the associated theta could be offset using selective low-carry structures and active trading.
Outlook
September market dynamics revealed a compelling convergence across traditionally uncorrelated assets, with both risk assets and safe havens rallying simultaneously, suggesting that underlying monetary considerations may be driving capital toward real assets as currency debasement concerns mount. Our Siemens Energy convertible investment exemplifies the opportunities available through disciplined risk management during periods of exceptional volatility, while constructive M&A activity and strong convertible primary markets signal continued momentum ahead.
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.
Changes in rates of exchange may have an adverse effect on the value, price or income of an investment.
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.