© Reuters. FILE PHOTO: A Hong Kong greenback word is seen on this illustration picture May 31, 2017. REUTERS/Thomas White/Illustration


By Georgina Lee

HONG KONG (Reuters) – Investors eager for publicity to China’s financial reopening however unwilling to wager unreservedly are turning to convertible bonds issued by Asian corporations, in order that they receives a commission an earnings whereas being positioned for some upside if shares rally.

Funds that put money into Asian convertible bonds attracted inflows of $118.1 million in January and February, information from Morningstar exhibits, bucking the general outflows recorded for the greater than 350 convertible bond funds it tracks globally.

The flows have gone into convertible bonds of corporations whose shares have been in lengthy decline, lots of them Chinese corporations within the web, expertise and airline sectors listed in Hong Kong, which might push convertibles pricing right into a so-called candy spot.

Convertible bonds are hybrid securities with most, like an everyday bond, paying a coupon.

The worth of the convertible bonds is delicate to prevailing rates of interest however their worth additionally will depend on the corporate’s inventory, as they embody a conversion choice, so some buyers see bargains in convertibles of beaten-down corporations.

“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,” mentioned Girish Kumarguru, portfolio supervisor at alterative asset supervisor, China Everbright (OTC:) Assets Management.

Convertibles of China app platform Meituan, smartphone maker Xiaomi (OTC:) Corp and Korean metal maker Posco Holdings are all buying and selling at enticing ranges for buyers to personal the convertibility choice, since they’re priced kind of like bonds and the choice value is minimal.

This signifies that conversion costs are far greater than present inventory costs. But it additionally means low-cost publicity to the potential upside – one thing not provided by an everyday bond, whereas it pays an earnings not out there with an everyday choice.

Hong Kong flagship airline Cathay Pacific’s 2.75% 2026 convertible gives an instance.

Compared to the 6% yield paid by its common bond, convertible bond buyers get much less, with present pricing implying a yield of round 2.5%. But with the inventory at HK$7.53 and rising, it’s getting nearer to the HK$8.57 conversion worth – a stage the place buyers have publicity to inventory worth positive factors, and safety on the draw back due to the bond worth.

Fund managers say China’s reopening may drive related dynamics in different sectors.

“Measures to boost consumption in China should be favourable to Asian convertible bonds as there are numerous consumer-related issuers in this region,” mentioned Skander Chabbi, head of world convertible staff at BNP Paribas (OTC:) Asset Management based mostly in Paris.

Recent volatility in fastened earnings markets has stalled some movement into convertibles, however merchants count on it might probably decide up once more.

“Trading volume was massive in Jan 2023 as everyone was chasing for risk after a tough 2022,” mentioned William Lam, head of Asia convertible bond buying and selling at BNP Paribas in Hong Kong.

“Overall, we should see more volume in 2023 than 2022 for the same period.”