.jpg)
Investors who want to capitalize on China's economic reopening but don't want to take on too much risk are turning to convertible bonds issued by Asian companies. These bonds allow investors to earn income while positioning themselves for potential upside if stocks rally. In January and February, funds that invest in Asian convertible bonds received inflows of $118.1 million, according to data from Morningstar. This bucks the overall outflows recorded for more than 350 convertible bond funds tracked globally.
Many of the convertible bonds receiving attention are issued by Chinese companies in the internet, technology, and airline sectors listed in Hong Kong. These firms' shares have been declining for some time, but the convertible bonds' value is also sensitive to prevailing interest rates and the company's stock, as they include a conversion option. As a result, some investors see bargains in the convertibles of beaten-down firms.
Girish Kumarguru, a portfolio manager at alternative asset manager China Everbright Assets Management, said, "Some Asian convertible bonds are attractive as they offer investors comparable or better yields for a shorter duration than straight bonds, as they come with an inexpensive equity option."
For example, convertible bonds of China app platform Meituan, smartphone maker Xiaomi Corp, and Korean steel maker Posco Holdings are all trading at attractive levels for investors to own the convertibility option. They are priced more or less like bonds, and the option cost is minimal, which means conversion prices are far higher than current stock prices. This provides cheap exposure to potential upside, something not offered by a regular bond, while it pays an income not available with a regular option.
Hong Kong flagship airline Cathay Pacific's 2.75% 2026 convertible is another example. Compared to the 6% yield paid by its regular bond, convertible bond investors receive less, with current pricing implying a yield of around 2.5%. However, with the stock at HK$7.53 and rising, it is getting closer to the HK$8.57 conversion price. Once it reaches that level, investors will have exposure to stock price gains and protection on the downside thanks to the bond value.
Fund managers believe that China's reopening could drive similar dynamics in other sectors. Skander Chabbi, head of global convertible team at BNP Paribas Asset Management based in Paris, said, "Measures to boost consumption in China should be favourable to Asian convertible bonds as there are numerous consumer-related issuers in this region."
Although recent volatility in fixed income markets has stalled some flow into convertibles, traders expect it can pick up again. William Lam, head of Asia convertible bond trading at BNP Paribas in Hong Kong, said, "Trading volume was massive in Jan 2023 as everyone was chasing for risk after a tough 2022. Overall, we should see more volume in 2023 than 2022 for the same period."
