Above all, we need to distinguish between geopolitics and geopolitical crises. By its very nature, a geopolitical crisis is a factor that cannot be quantified, modelled or controlled. We must therefore consider it as an exogenous factor in asset allocation. In fact, it has always been at the top of the list of “conceivable” risks for all strategists and economists, every quarter and every year. In other words, we need to bear in mind that geopolitical risk can interfere with our assumptions and scenarios.
2022 was the worst year since 2008 for the Convertible Bond asset class. None of the pillars of the asset class helped. We experienced a sharp rise in interest rates to fight global inflation which marked the end of a lengthy interest rate bull market. Corporates credit spreads widened significantly, and equity markets all closed with a negative performance for the year. Even equity volatility, despite having changed regime, was not very supportive with most volatility trading between 20 and 30 level with some spike in Europe in March due to the war in Ukraine.