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Due to factors such as credit rating downgrades and concerns about the delisting of the underlying stocks, low-priced convertible bonds have performed poorly. The convertible bond market has undergone a significant adjustment since May. The CSI Convertible Bond Index has fallen by more than 4% this year, and the Convertible Bond Equal Weight Index has fallen even more this year, with a cumulative decline of nearly 10%.

The overall performance of convertible bond theme funds is poor. As of the latest, only a few convertible bond theme funds such as ICBC Convertible Bond and Minsheng Jiayin Convertible Bond Preferred have maintained positive returns this year. The net value of many convertible bond theme funds has fallen by more than 10% this year.

However, from the perspective of capital flow, the scale of the only two convertible bond ETFs on the market has repeatedly hit new highs, and funds are buying more as the price falls. The reason behind this is that some institutions believe that the current convertible bond market is in a low-price and low-valuation range, and the left-side configuration value is significant.

Convertible bond market performance continues to be sluggish

Sentiment in the convertible bond market has become increasingly fragile recently.

On the evening of August 13, Blue Shield issued a debt repayment announcement stating that due to the company's debt crisis and operational crisis, huge debts were overdue, the company's main bank accounts and assets had been frozen/sealed by the court, and there was a serious shortage of funds. The principal and interest of the "Blue Shield Debt Refund" convertible bonds that should have been paid on August 13 could not be paid on time. In view of the company's failure to pay the principal and interest of the "Blue Shield Debt Refund" convertible bonds on time, bondholders can protect their own rights and interests through relevant legal channels such as relevant judicial channels.

After Soute’s bond refunding broke the 30-year record of zero default in the convertible bond market in May this year, Blue Shield’s bond refunding became the second convertible bond to have a substantial default. The Blue Shield convertible bond default shattered investors’ fluke mentality and cast a shadow on the convertible bond market again.

On the same day, Lingnan Shares stated that the company's existing cash and cash equivalents are insufficient to cover the redemption amount of the "Lingnan Convertible Bonds". The conversion period of the Lingnan Convertible Bonds issued by the company will end on August 14, 2024. Holders can only convert them into stocks. However, it is expected that the "Lingnan Convertible Bonds" will not be able to repay the principal and interest after maturity, and there is a significant risk of default.

The latest CSI convertible bond index is close to its low point for the year, with the year-to-date decline widening by more than 4%. The convertible bond equal-weighted index has fallen by nearly 10% this year.

As of now, there are 128 convertible bonds that have fallen below the face value of 100 yuan, accounting for 24.38%, which is close to a quarter of the entire market, and the market sentiment is full of pessimism.

Huatai Securities analyzed that the stock market has bottomed out but has no strong resonance, and it is difficult to look high in the medium term. Convertible bonds still need to wait for the general driving force of underlying stocks. However, the valuation of convertible bonds has fallen back to the historical low level, and YTM and absolute price have begun to provide a certain safety cushion. Of course, the problem with convertible bonds is that the stock nature is not good and the credit risk of some individual bonds has not been completely cleared.

The share of relevant convertible bond ETFs grew against the trend

The poor performance of the convertible bond market has dragged down the net value of convertible bond theme funds. Wind data shows that among the 72 convertible bond theme funds (shares are counted separately), only a few convertible bond funds such as ICBC Convertible Bond and Minsheng Jiayin Convertible Bond Selection have achieved positive performance returns this year, and the net value of many convertible bond theme funds has fallen by more than 10% this year, with Rongtong Convertible Bond and Dongfang Convertible Bond leading the decline.

The year-to-date returns of the two on-exchange traded ETFs, Haitong Securities SSE Convertible Bond ETF and Bosera Convertible Bond ETF, were 0.29% and -3.99%, respectively.

It is worth noting that the fund shares of the above two ETFs announced daily show that their scale is reaching new highs.

Data from Bosera Convertible Bond ETF showed that the circulating shares on August 15 were 1.56 billion shares, with a scale of 16.36 billion yuan, both of which were at historical highs. The shares increased by 172% compared with 573 million shares at the end of last year, and increased by 42.73% compared with the end of the second quarter of this year.

The scale of Haitong SSE Convertible Bond ETF also increased significantly. The circulating shares on August 15 were 126 million shares, and the scale was 1.3 billion yuan, both of which were at historical highs. The shares increased by 93 million shares compared with 33 million shares at the end of last year, an increase of 282%, and an increase of 26% compared with the end of the second quarter of this year.

According to a brokerage analyst, when the convertible bond market experiences a sharp pullback, the left-side allocation funds for convertible bonds will flow into convertible bond ETFs, causing the share of convertible bond ETFs to increase rapidly. The recent rolling quarterly growth rate of convertible bond ETFs is 104%, and funds are flowing into convertible bond ETFs for left-side allocation.

Institutions say left-side configuration has significant value

Convertible bonds are often considered to have the characteristics of "being able to attack or defend". When the stock price rises, the convertible bond price may usually follow the rise, and when the stock price falls, the convertible bond has the pure bond value as a safety cushion. Therefore, convertible bond ETFs are considered to be high-quality assets in asset allocation products, which help balance the risk and return of the investment portfolio and reduce portfolio volatility.

At present, the convertible bond market continues to perform poorly, and the occurrence of multiple default incidents has caused investors to question its safety.

Haitong Fund said that it is still optimistic about the convertible bond market. From the perspective of the time dimension within this year or the next year, convertible bonds have a higher probability of obtaining absolute returns compared to assets such as stocks and bonds. The relative returns depend on market beta. The current convertible bond market has been oversold, and the price-performance ratio is high. The probability of achieving higher returns than credit bonds and obtaining absolute returns before the end of the year is high. In an unstable market environment, more emphasis is placed on the "safety" of assets.

"From the perspective of absolute returns, current convertible bonds have good allocation value, but their upward elasticity may be less than that of stocks." Gui Zhenghui, deputy director of investment and fund manager of Bosera Fund Index and Quantitative Investment Department, analyzed that the current convertible bond price is low and the conversion premium rate is high. Compared with stocks, the current risk-return of convertible bonds is "asymmetric". In addition, the credit risk disturbance of convertible bonds has increased compared with the past. When seizing convertible bond investment opportunities, it is necessary to carefully evaluate the credit risk of individual bonds.

Another securities analyst said that based on the market YTM difference and pricing deviation, the return of CSI convertible bonds in the next six months is regressed. When the market is in a low-price and low-valuation range, the expected return of CSI convertible bonds in the future is higher. The expected return of CSI convertible bonds in the next six months is 6.76%, which shows that the current convertible bond market is in a low-price and low-valuation range, and the left-side configuration value is significant.

Looking at specific products, Haitong Fund believes that in the future, it will tend to favor products with low prices, good credit and short remaining terms (within 3 years).

Huatai Securities recommends investors to "do the left side locally", layout convertible bonds and focus on individual bonds based on odds. Focus on low-priced individual bonds that are not far from the bond bottom, have decent stock performance and no credit flaws, and gamble on allocation premiums, especially those that can be invested by insurance funds. In addition, the opportunity for terms gamble is still important and should be explored in the near future.

Source: China Securities

Statement: All information content of Databao does not constitute investment advice. The stock market is risky and investment should be cautious.

Editor: He Yu

Proofreading: Yang Shuxin

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