Megatrends are macroeconomic and geostrategic forces that have a lasting influence on the development of the global economy. They provide society with major opportunities and challenges in equal measure. The formation of these trends can be witnessed, empirically, quantitatively and visually, over a period of years, or even decades, and they have predictive power in respect of future evolution. Megatrends are primarily driven by the continuous changes in societal needs, demographic developments, shifts in economic prosperity, technological progress and awareness of the planet. In order to be able to benefit from megatrends, it is necessary to identify innovative companies within forward-looking sectors that embrace these trends in the formulation of their products and services.
The universe of convertible bonds (CBs) is structurally oriented towards growth sectors or up-and-coming companies with positively disruptive business models. This reflects the fact that listed growth companies are able to access fresh capital earlier by issuing convertible bonds than they could through conventional bonds. This inherent structure of convertible bonds, with their combination of bond attributes and equity participation through the embedded call option on the underlying stock, provides investors with the potential to harness the future success of an innovative enterprise at an early stage. At the same time, they can exercise the call option in a later phase of the evolution and become a shareholder, thereby continuing to participate in the company’s success. From a corporate perspective, keeping the cost of capital as low as possible directly impacts the trajectory of future growth, and the flexibility provided by the convertible bond structure allows the issuer to offer a lower coupon rate than would be possible via the conventional bond route. Consequently, many exciting enterprises choose to issue convertible bonds during the initial growth phase.
At the same time, however, the CB universe also offers distinct value exposure via sectors like banking, insurance, REITs and consumer staples. This means there are sufficient alternatives for investors to react to changing market trends, sector rotations or shifts in the market cycle.
The companies mentioned in the following sections below provide useful examples of the potential opportunity set, but do not remotely constitute an exhaustive list. These are not recommendations, and comprehensive analysis of company fundamentals and the respective convertible bond specifications should be considered a pre-requisite to investment.
Megatrend 1: Climate change and scarcity of resources
Electric vehicles
The transportation sector plays a key role in the shift towards a climate-neutral economy. Widespread use of electric vehicles (EV) on the roads instead of those with conventional combustion engines presents a viable solution for significantly reducing emissions. In many countries, the purchase of electric vehicles is supported by subsidies, while in the case of China, the world’s biggest car market, sales are underpinned by electric car quotas. In addition, technological advances in terms of the single-charge driving distance and shorter charging times are ensuring rapid market growth. One of the biggest beneficiaries of these developments is Tesla, the name that is synonymous with the electric vehicle trend. In addition to leading the field in electric vehicle production and sales, Tesla also has its own battery production facilities to reduce production costs and further develop the technology. Meanwhile, Chinese electric car manufacturer Nio takes a different approach. Fading batteries can be replaced at Nio stations in less than three minutes, thus negating the need for ubiquitous charging points. Both Tesla and Nio are represented in the convertible bond universe, along with China’s second-largest EV producer, Geely.
Batteries
With the rapid development of electric vehicles, the need for high-performance batteries is growing, which is already leading to capacity bottlenecks. One of the leading producers, and also Tesla’s biggest battery supplier, is South Korean convertible bond issuer LG Chem, while Glencore (another CB issuer) is a leading supplier of essential raw materials for battery production, such as cobalt and nickel. Other necessary components , separators for example, are manufactured by Toray and Teijin, with Mitsubishi Chemical (among others) meeting the need for anodes. The latter three names are based in Japan and have convertible bonds available for purchase on the secondary market. Meanwhile, Belgian company Umicore, a provider of catalytic converters to reduce harmful emissions from combustion engines, as well as being a supplier of cathodes to produce batteries for hybrid and electric vehicles, is also part of the CB universe. A further compelling attribute of Umicore is that it maintains highly efficient facilities in order to recover precious metals from industrial residues (electronic waste, fuel cells, batteries etc.).
Hydrogen
At the same time as car manufacturers and equipment suppliers are significantly driving forward their research in relation to electric vehicles, they are also continuing to develop another alternative to conventional combustion engines: hydrogen technology. Against the backdrop of “net zero policies” (carbon dioxide emissions must be offset elsewhere), technological progress and lower production costs, the momentum behind hydrogen is strengthening as it offers an effective solution to the decarbonisation of the economy. Companies have been working on researching and improving this technology for decades. Meanwhile, its use is more efficient and cost-effective than ever before and is attuned to an environment with a strong focus on sustainability, which could allow for a decisive breakthrough to the mainstream market. Until now, hydrogen technology has been primarily promoted as an alternative industrial application to fossil fuels. Its main appeal is that it offers a better range than electric vehicles, faster charging/refuelling and less expenditure in terms of the required infrastructure. Although comparatively cheap to roll out and integrate, it is the lack of existing infrastructure that currently constitutes a bottleneck for the otherwise production-ready technology. In terms of the total cost, hydrogen-powered trucks are already more economical than diesel engines, despite the purchase price being twice as high. In aviation, hydrogen offers a much more realistic solution as opposed to electric engines, and will come into use as of 2023. The CB universe comprises a number of companies with a high level of exposure to hydrogen. These include Bloom Energy, a provider of hydrogen-powered fuel cells, and Volvo AB, a Swedish manufacturer of hydrogen-powered trucks and buses. Further examples include Siemens Energy, a producer of electrolyser systems that generate hydrogen from wind and solar power, and Plug Power, a provider of a wide variety of hydrogen-based solutions and services.
Renewable energies
Another megatrend is the huge rise of renewable energies, which will one day completely replace electricity generated from fossil fuels. Solar, wind and hydro power plants require substantial development in order to progressively replace traditional energy sources and, as such, benefit from significant government subsidies globally. The primary beneficiaries of these investments are major integrated companies, such as Iberdrola and Next Era Energy, which are active not only in production but also in transporting the power generated. There are also small, specialist companies including Encavis, Neoen and Falck Renewables that offer investment opportunities in the form of convertible bonds in this long-term growth story.
Plant-based sources of protein
An ever-growing population in emerging countries continues to boost demand for meat production. This surge in demand requires increased efficiency in the food industry. At the same time, however, there is a growing need among consumers in developed countries for alternative sources of protein. In particular, there is huge demand for plant-based proteins that are similar to animal-derived products in terms of their texture and taste. Global research in this area has progressed accordingly, and various producers offer vegetarian burgers and vegan cheese, among other products. A major supplier to this industry is Symrise, which provides speciality chemicals products used in the production process for vegetarian and vegan dishes as a substitute for meat. Symrise is a convertible bond issuer.
Sustainable construction
Swiss CB issuers Sika and LafargeHolcim play an important role in reducing emissions from buildings and the construction of more energy-efficient structures. Sika offers the most up-to-date sustainable solutions in the area of roofing and flooring, while LafargeHolcim is a leading provider of more environmentally friendly cement and concrete. In addition, German speciality chemicals producer Evonik Industries also helps to build more energy efficient homes by providing insulation panels, while Lixil, a leading Japanese manufacturer in the area of building interiors and exteriors, offers efficient water technology solutions to reduce household water consumption. Both Evonik and Lixil are present in the convertible bond market.
Solar technology
With the transfer of power at the White House and the renewed commitment to the Paris Accord, the political focus is increasingly on alternative energy sources, which is in line with the EU’s Green Deal. The development of electricity generation from photovoltaic systems will experience a boost, which should benefit various companies. Among those involved in this area with outstanding convertible bonds are SolarEdge, Enphase Energy, Maxeon Solar, Prysmian (development of branched cable networks), SunPower, SunRun and Schneider Electric.
Megatrend 2: Technological progress
Cybersecurity
US President Joe Biden has prioritised the comprehensive defence of computers, servers and mobile devices, as well as the protection of networks and data, from malicious external infiltration. This follows a wide-ranging and sophisticated cyberattack on major US agencies (including the atomic energy agency) and a variety of software companies last year. Various names from the convertible bond universe are active in this highly specialised software area, including Palo Alto Networks, Proofpoint, CyberArks and FireEye.
LiDAR sensor technology
LiDAR (Light Detection and Ranging) systems emit laser pulses and detect the backscattered light. The distance to the backscatter location is calculated from the light running time of the signal. This technology is used not only in smartphones (facial recognition, augmented reality) but is also of pivotal importance in assisted or autonomous driving (autopilot, lane assistant etc.). Various convertible bond issuers play a leading role in this promising specialist area, such as Austria’s ams AG and US companies Lumentum and Viavi Solutions.
Silicon carbide semiconductors
Semiconductors made from silicon carbide (SiC) advance the power electronics in batteries and sensors to a new level. They thereby significantly support the breakthrough of electric vehicles and the digitisation of society. The advantages of SiC semiconductors, compared with their conventional counterparts, relate to their speed (higher switching frequencies), lower density (lighter weight) and lower heat emissions (up to 50%). The areas of application are extremely multifaceted, such as the additional utility they provide to electric cars and smartphones (faster battery charging times), 5G wireless technology and to the improvement of server performance. Convertible bond issuers active in this arena include France's SOITEC, US company Cree and Japan's industry leader Rohm, which already produces the third generation of SiC semiconductors.
Megatrend 3: Rapid urbanisation
5G standard
5G (fifth generation) is the latest mobile phone standard, which has been gaining in importance since 2019, and is the driving force in the development of the Internet of Things (IoT), i.e. the connection between people and also the alignment of machines, objects and devices. By virtue of a massive increase in spectrum capacity compared with the previous 4G standard, the communications network has been developed significantly, and is therefore better able to keep pace with the megatrend of urbanisation. A number of convertible bond issuers, from chip manufacturers to mobile phone providers and tower operators, are involved in developing the 5G infrastructure. These include Hon Hai Precision Industry, AMD, Innolux, Yageo, Cellnex, T-Mobile and Crown Castle.
Megatrend 4: Societal change
E-commerce
Even before Covid-19 catalysed a transformation of business models, a growing proportion of retail trade had already moved online. For example, the classic e-commerce platforms, such as China’s Alibaba and South America’s Mercardo Libre provide a comprehensive offering with buying suggestions tailored to the customer. A social shopping experience is possible with Chinese platform Pinduoduo, which motivates customers to get together in groups in order to benefit from lower prices. E-commerce platforms specialising in products including fashion items (Zalando), luxury items (Farfetch), home furnishings (Wayfair / RH) and DIY items (Etsy) are experiencing strong growth in users and revenues. The convertible bond universe offers a number ways in which to access the burgeoning e-commerce trend.
Digital health
Digitisation has also gained a foothold in the area of healthcare and is being used more and more in medical facilities by health workers and patients alike. Technological progress often helps to reduce costs, increase quality and minimise inefficiencies. The use of internet applications delivers innovative ways of monitoring our health and wellbeing, and allows for better access to information, with users being able to manage and track their health data. “Remote medicine” has gained considerably in importance with Covid-19. The US government removed existing regulatory obstacles and actively encouraged patients to seek online consultations with their doctors. Teladoc Health is one of the leading remote medical platforms, which has been able to benefit considerably from the acceleration in digitisation as a result of the pandemic. Dexcom’s CGM (Continuous Glucose Monitoring) technology allows diabetics to measure their glucose levels in real time, accessing both current and past readings through their smartphone and sharing this information with others. For individual sufferers and the parents of small children afflicted with diabetes, this technology provides a huge source of relief.
Megatrend 5: Growing global wealth
Rising consumption
Since its economy opened up around 40 years ago, China has experienced unprecedented economic growth and is expected to overtake the US as the world’s largest economy by the end of this decade. By 2050, five of the world’s six biggest economies will belong to emerging countries. This new wealth paradigm also allows a population of billions to climb the social ladder towards becoming part of the global middle class. These vast sales markets offer an attractive opportunity for global luxury goods providers, such as French groups LVMH and Kering, as well as online platforms specialising in high-priced goods, such as Farfetch. Global car manufacturers, e.g. Daimler and Tesla, as well as equipment suppliers including Pirelli and Michelin, are direct beneficiaries of the burgeoning middle classes in emerging countries. For example, China has long been the largest market for car sales. The big sports goods manufacturers, such as Puma and Adidas can also benefit from rising demand for athletic attire and sporting equipment. The convertible bond market offers a variety of opportunities to participate in this megatrend. Convertible bonds of all of the companies mentioned above are accessible in the secondary market.
Convertible bonds offer a unique opportunity to invest in the megatrends of the future.
By virtue of the attractive global investment universe for convertible bonds, with many issuers playing a leading role in shaping the future, CB investors can benefit from the opportunity to participate in developments relating to megatrends. We also expect increased activity in the primary market from associated companies this year and in the period that lies further ahead. The universe should dynamically align itself with the trends and continue to offer exciting investment opportunities in the future. Depending on the chosen strategy and the underlying investment universe associated with it, the allocation between growth and value sectors – and correspondingly the emphasis on megatrends – can differ considerably. In any case, however, convertible bond investors will be able to participate in megatrends, such as climate change, scarcity of resources, technological progress, rapid urbanisation, societal change and growing global wealth.