• News
• 2024-06-21

Convertible Bonds Market "Roller Coaster": Assessing Future Investment Value

After the National Day holiday, as the equity market fluctuated, the convertible bond market also experienced significant volatility. The China Convertible Bond Index reached a new high since September 2022 on October 8th, and then continued to decline.

Industry insiders believe that the phased adjustment does not affect the investment value of convertible bonds. With the continuous implementation of policies, the equity market is expected to return to growth, and the catch-up rally in the convertible bond market is anticipated.

The convertible bond market showed significant fluctuations after reaching a new high and continued to decline. Recently, the convertible bond market has been quite volatile.

From September 24th to October 8th, the China Convertible Bond Index continued to rise, with the maximum rebound exceeding 15% during the period. On October 8th, it even reached 421.12 points at one point, setting a new high since September 2022. At the same time, the transaction volume of the convertible bond market on that day exceeded 150 billion yuan, setting a new high for the year, and several convertible bonds hit the daily limit. However, after that, the China Convertible Bond Index began to fluctuate downwards, falling by more than 4.6% from October 9th to October 11th.

Advertisement

Deng Xinyu, head of the mixed asset group of the fixed income investment department of CEF, said that as macro policies continue to optimize, investor expectations change, market sentiment recovers rapidly, and the equity market rises rapidly, the convertible bond market follows the equity market and has a certain increase.

"The market situation can generally be analyzed and observed in two stages, valuation repair and fundamental driving. In the short term, it is mainly the valuation repair under policy changes, and it is necessary to observe the actual situation of policy implementation and the expectation of improvement in the economic fundamentals," said Deng Xinyu.

Zheshang Securities believes that the fundamental reason for the fast repair speed of this round of convertible bonds is that the speed of the equity market's rise after the 924 financial new policy far exceeds history; the fundamental reason for the high repair amplitude of this round is that investors' concerns about credit risk from June to August led to the instability of the convertible bond's debt bottom, and the convertible bond fell more.

On the other hand, with the recent overall recovery of the equity market, the situation of a large area of convertible bonds "breaking net" is continuously improving. As of the close on October 11th, there were 97 convertible bonds that broke the face value, a decrease of 41.2% compared to 165 on September 23rd. In addition, among the convertible bonds that broke the face value, the prices of 72 convertible bonds were between 90 yuan and 100 yuan, accounting for more than 70%.

Looking forward, Deng Xinyu believes that as the pessimistic sentiment in the convertible bond market is reversed, the valuation repair of convertible bonds may still have some room in the future, and the improvement of the subsequent conversion value is also worth looking forward to.Zheshang Securities stated that following the conclusion of the Ministry of Finance's press conference on October 12th, the focus of the capital market is also adjusting, overall showing a "bullish are bullish" sentiment. The fiscal policy side has released relatively positive signals and has reserved ample space for subsequent policy efforts, which is expected to effectively support and underpin the equity market, propelling it back into an upward trend. From a medium-term perspective, the convertible bond market is expected to rise along with the equity market.

Huaxi Securities also believes that even in the face of periodic headwinds, with the shift in policy tone, especially after the implementation of fiscal policies, convertible bond investors' concerns about volatility control will be further corrected. Coupled with the current historically high static yield levels, the valuation of convertible bonds still has strong repair momentum. Considering that policies are gradually intensifying, once the upward trend of the underlying stocks is established and the cost-effectiveness of convertible bonds is sufficient, it is highly likely that convertible bonds will experience a catch-up rally.

Valuation Still at a Low Level, Suggests Actively Grasping Investment Opportunities

Industry insiders have indicated that the overall valuation of convertible bonds is still at a low level, suggesting the construction of portfolios around the repair of convertible bond valuations and actively seizing investment opportunities.

Huaxi Securities stated that by comparing the prices of all market convertible bonds at the same parity since 2020, they found that the current convertible bond prices are lower than any comparable phase, and even the current bond bottom support level is higher than previous phases. After experiencing significant fluctuations, the convertible bond market still has enough "cost-effectiveness."

"Convertible bond valuation is still at a historically neutral and slightly low level, and the absolute price is also at a neutral level, which has a high participation value," said Deng Xinyu of CEFUND, suggesting that in terms of investment strategy, it is recommended to focus on two dimensions: individual bond valuation and the operating quality of the underlying stocks, looking for low valuation and high-quality individual bonds. Additionally, the repair of option value is also an important perspective, with some varieties that are underpriced and do not have high conversion premiums worth considering first, balancing defensiveness and offensiveness.

Gao Hui, the fund manager of Bosera Convertible Bond ETF, also stated that in the long term, the convertible bond market's ability to achieve absolute returns brought by parity increases, valuation repairs, credit risk premium repairs, and clause games (redemption) is worth looking forward to, and the investment opportunities of convertible bonds in the broader fixed-income assets should be actively valued at present.

Gao Hui believes that the timing for adding positions on the right side in the medium to long term may have arrived, with the historically negative pure bond premium rate level marking the starting position of convertible bonds at a historically relative low level. In terms of structure, consider a barbell configuration; on the one hand, "low price + double low" is expected to perform strongly in the valuation repair market; on the other hand, stock-type low premium targets are expected to follow the upward movement of the underlying stocks to gain elasticity. After liquidity enters, pay attention to small-cap convertible bonds with thematic catalysts, such as low-altitude economy, data elements, intelligent driving, etc.

Huafu Securities stated that under the current market conditions, there is hope for a rebound in valuation in industries that have previously adjusted their valuations, which will constitute excess returns beyond the contributions of convertible bond stocks. In terms of allocation direction, it is currently recommended to focus on convertible bonds in the financial sector, high dividend sectors such as public utilities and coal, convertible bond targets related to the A500 index, and balanced convertible bonds with significant valuation compression in the previous period.