Investors ride out China uncertainty in convertible bonds

China Everbright

31/03/2023 02:00

By Georgina Lee
       HONG KONG, March 31 (Reuters) - Investors keen for
exposure to China's economic reopening but unwilling to wager
unreservedly are turning to convertible bonds issued by Asian
companies, so that they get paid an income while being
positioned for some upside if stocks rally.
    Funds that invest in Asian convertible bonds attracted
inflows of $118.1 million in January and February, data from
Morningstar shows, bucking the overall outflows recorded for the
more than 350 convertible bond funds it tracks globally.  
    The flows have gone into convertible bonds of firms whose
shares have been in long decline, many of them Chinese companies
in the internet, technology and airline sectors listed in Hong
Kong, which can push convertibles pricing into a so-called sweet
spot.
    Convertible bonds are hybrid securities with most, like a
regular bond, paying a coupon. 
    The value of the convertible bonds is sensitive to
prevailing interest rates but their price also depends on the
company's stock, as they include a conversion option, so some
investors see bargains in convertibles of beaten-down firms.
    "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," said Girish Kumarguru, portfolio manager at alterative
asset manager, China Everbright Assets Management  0165.HK .    
    Convertibles of China app platform Meituan  3690.HK ,
smartphone maker Xiaomi Corp  1810.HK  and Korean steel maker
Posco Holdings  005490.KS  are all trading at attractive levels
for investors to own the convertibility option, since they are
priced more or less like bonds and the option cost is minimal.
    This means that conversion prices are far higher than
current stock prices. But it also means cheap exposure to the
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  0293.HK  2.75%
2026 convertible  HK228786756=  offers an example.
    Compared to the 6% yield paid by its regular bond,
convertible bond investors get less, with current pricing
implying a yield of around 2.5%. But with the stock at HK$7.53
and rising, it is getting closer to the HK$8.57 conversion price
- a level where investors have exposure to stock price gains,
and protection on the downside thanks to the bond value.
    Fund managers say China's reopening could drive similar
dynamics in other sectors.      
    "Measures to boost consumption in China should be favourable
to Asian convertible bonds as there are numerous
consumer-related issuers in this region," said Skander Chabbi,
head of global convertible team at BNP Paribas Asset Management
based in Paris.  
    Recent volatility in fixed income markets has stalled some
flow into convertibles, but traders expect it can pick up again.
    "Trading volume was massive in Jan 2023 as everyone was
chasing for risk after a tough 2022," said William Lam, head of
Asia convertible bond trading at BNP Paribas in Hong Kong.
    "Overall, we should see more volume in 2023 than 2022 for
the same period." 
    

 (Reporting by Georgina Lee; editing by Robert Birsel)
 ((Georgina.Lee@thomsonreuters.com;))