Unlocking Opportunities: Navigating the Fast-Growing Asian Convertible Bond Market

Let’s dive into the exciting and fast-growing world of Asian convertible bonds. As a bond expert, I will offer my perspective on the attractive opportunities in this market, especially in the context of economic growth, global supply chain shifts, and the transition to renewable energy.

CHART 1: Worst MSCI Asia ex Japan (and Hang Seng) month compared to Refinitv Asia ex Japan

Convertible bonds, which blend characteristics of debt and equity, present appealing opportunities for companies seeking more cost-effective financing tools as the era of ultra-low interest rates draws to a close. They promise investors a steady income stream while also offering the potential for capital growth if the issuing company’s stock price appreciates.

Asian convertible bonds specifically provide exposure to one of the world’s fastest-growing regions, and importantly, serve as a buffer against the volatility of equity markets. In terms of protecting investors from losses, these bonds have outperformed, shielding investors from over half of the equity market downturns.

CHART 2: Asian convertibles vs equities

In months when the markets have underperformed, these bonds have held up better than equities, demonstrating their built-in stabilizing features. Specifically, they’ve shown a loss of -3.7% compared to a more substantial -8.2% for equities.

Convertible bonds’ appeal lies in their performance in volatile markets. They offer exposure to the potential upside of an issuer’s stock price while also limiting the downside risk. Further, they offer diversification benefits across different issuers and industries.

Interestingly, the Asian convertible bond market remains underrepresented in global portfolios, creating a valuable opportunity. Compared to other markets, particularly those from the US and Europe, Asian convertible bonds present attractive valuations.

From a macroeconomic viewpoint, Asia houses some of the world’s fastest-growing economies, including China. Factors such as a growing middle class, urbanization, and supportive government policies present lucrative opportunities for companies operating in this market, particularly in the technology sector.

The global supply chain shift, driven by rising labor costs in China, US-China trade tensions, and the Covid-19 pandemic, has favored Asian economies. Countries like Vietnam, Taiwan, India, and Malaysia are poised to gain the most from this shift over the next three to five years, promoting greater economic integration and fewer non-tariff barriers.

Chart 3: Current convertible valuations

China’s energy transition, particularly in electric vehicle (EV) manufacturing and renewable energy technologies, is unveiling new opportunities. Cheaper electricity and government policies incentivizing charging station infrastructure have spurred rapid growth in China’s NEV market.

The EV and battery sector presents promising prospects for convertible bond investors. Market leaders with superior economies of scale and bargaining power are well-positioned to achieve profitability in the battery space, thanks to supportive policies and potential demand recovery for EV batteries.

The energy transition has also sparked significant demand for lithium. Despite an anticipated drop in lithium carbonate prices, lithium producers with higher self-sufficiency rates can maintain stronger profitability due to lower production costs.

Chart 4: Hang Seng and CSI 300 vs global MSCI World

In conclusion, the Asian convertible bond market offers compelling opportunities against the backdrop of rapid economic growth, shifting global supply chains, and the transition to renewable energy. Investors seeking a steady income with the potential for capital appreciation should consider the merits of this market. As always, understanding these dynamics and staying informed about trends and opportunities is critical to successful investing.