Convertible bonds: positioned for another year of growth and resilience

Convertible bonds (CBs) enter 2026 from a position of strength. They’ve regained the investors’ spotlight after delivering double-digit returns and outperforming other financial assets, including global stocks. With record issuance fuelled by AI-driven growth and a broadening rally across the global stock markets, the ingredients are in place for another strong year. Our reliable indicator adds to the positive picture, pointing to continued significant undervaluation of earnings growth of convertible bonds issuers.

Measured by the FTSE Global Convertible Vanilla Hedged Index, CBs delivered 21.4% in US dollars in 2025, outperforming not only traditional fixed income assets but also many stock markets, e.g., MSCI World Hedged (+19.0%) and S&P 500 (+17.9%). Importantly, CB returns came with roughly half of the volatility and drawdowns of global stocks. This is a powerful asymmetric combination: gains from rising stock prices, particularly of high-growth companies, with downside cushion from fixed-income components.

AI and secular growth with asymmetry
A significant share (around 40%) of 2025 returns were driven by companies in the AI value chain, including semiconductors, data centres, software and power. At the start of 2026, about a third of the equity exposure of the CB market is in some of the most exciting companies in this space.

While a sharp reversal in the AI capex cycle clearly poses risks, the structural backdrop remains supportive. Expectations of accelerating productivity gains, alongside “triple easing” in the US – easy fiscal policy, easing monetary conditions and easing regulation – continue to underpin the theme. Crucially, the asymmetric risk-return profile of convertibles, combined with more reasonable issuer valuations, should enable investors to weather corrections a lot better than some of the more richly valued segments of the stock market.

Growth at a more reasonable price
Despite the significant recent gains, the earnings growth potential of CB issuers remains undervalued relative to the broader stock market. The price/earnings to growth (PEG) ratio shows a discount of over 40% (as of 31 Dec 2025), creating an attractive growth-at-a-discount setup. Our PEG-based leading indicator for convertibles outperforming stocks continues to signal a strong year ahead. This indicator has proven highly reliable over almost two decades, including the past year.

Issuance is the lifeblood that feeds opportunities to investors
The primary market hit a record in 2025 with almost USD 180 billion and more than USD 300 billion over the last two years. We expect the issuance wave to persist, with the first two weeks of January already bringing the fastest start on record. Activity is driven by refinancing needs as post-Covid vintage CBs approach maturity, ongoing capex requirements (including AI-related investment), and rising mergers & acquisitions activity.

Another notable development has been the record Asian issuance and blue-chip Asian technology companies like Alibaba entering the convertible bonds market. This is presenting fresh opportunities for investors as the valuations of some of these stocks are significantly lower than their US counterparts.

Well positioned for 2026
After a strong resurgence, convertible bonds enter 2026 with supportive fundamentals: secular growth themes, attractive relative stock valuations, a renewing opportunity set, and built-in asymmetry. The last 12 months’ returns are a textbook example of the strategic benefits of this asset class in diversified portfolios. Now, uncertainty is on the rise with an AI bubble bursting added to the usual geopolitical and trade-related fears. In a volatile market with large valuation and performance differences, a selective approach is even more important for successful results.