October: Convertible Bonds Gaining Momentum

Market Overview for September

In September, the equity and convertible bond markets experienced a notable performance review. The equity market exhibited a “V-shaped” trend. As of September 26, A-shares showed slight weakness overall, while the Sci-Tech 50 index stood out with an impressive increase of 8.16% during the month. Smaller capitalization stocks underwent a narrow correction, with major indices, including the Wind All A and other broad-based indices, reporting monthly gains of less than 3%. The advanced manufacturing and technology TMT sectors led the market with monthly increases of 5.86% and 3.57%, respectively. Meanwhile, cyclical sectors experienced fluctuations, with a marginal rise of 0.72%. Conversely, financial real estate, pharmaceuticals, and consumer goods sectors declined by 6.04%, 3.31%, and 2.81%, respectively.

The convertible bond market showed weakness, with high-priced convertible bonds and those with strong redemption structures performing better. By September 26, AA and AA- rated convertible bonds gained over 2% for the month, while AAA rated bonds fell by 1.91%, underperforming other ratings with a year-to-date return of only 5.24%. High-priced convertible bonds have outperformed for two consecutive months, with a September gain of 2.29% and a cumulative year-to-date increase of approximately 23%, significantly better than the market average.

Although convertible bond valuations and prices have receded from their peaks, they remain historically high. As of September 26, the median price of convertible bonds in the market was still above 130 yuan, the highest point since 2017. The median premium rate for bonds priced at par was at 29.05%, which is at the 95th percentile since 2018.

Outlook for October and Beyond

Looking ahead to October and beyond, the Fourth Plenary Session of the 20th Central Committee will be held in Beijing. We anticipate that while there may be fluctuations in the equity market during this period, the medium-term upward trend will remain unchanged. Key domestic meetings, tariff policies, and recent developments in the field of technological autonomy will be important to monitor. Historically, the first week following the National Day holiday tends to see increases in A-shares, so attention should be paid to market activity post-holiday, especially regarding consumption and economic data.

In terms of industry trends, we observe a weakening “anti-involution” effect. Prices for steel, chemicals, and building materials have shown marginal declines, while livestock profits have significantly dropped. However, new energy vehicle sales continue to reach new highs, and demand for consumer electronics has not shown substantial improvement. The new energy sector is showing signs of marginal improvement.

Convertible Bond Market Expectations and Strategy

Under the expectation of a bullish equity market, strategies focusing on high-priced and equity-biased convertible bonds are likely to maintain their advantages. Convertible bonds with strong redemption features exhibit distinctive characteristics, making them challenging as a consistent strategy. As the third-quarter earnings report season approaches, the market may focus on identifying quality assets based on fundamental improvements and economic conditions. The rotation of popular theme bonds remains a key direction in the convertible bond market. We recommend capitalizing on the trading opportunities in the first week following the National Day holiday.

In terms of strategy, we suggest maintaining a neutral position in convertible bonds, with a focus on low-priced convertible bonds and equity-biased convertible bonds. Special attention should be given to low-priced convertible bonds below 120 yuan that resonate with improving fundamentals and contractual terms. For equity-biased convertible bonds, we recommend focusing on high-performing small to mid-cap bonds with a remaining term of over 3.5 years. The market should also pay attention to convertible bonds supported by domestic policies in transportation, environmental protection, agriculture, construction, coal, and steel.

Convertible Bond Terms Tracking and Supply-Demand Outlook

In September, five convertible bonds proposed adjustments, with a downward adjustment tendency of about 20.8%. From the end of September to October, around 52 convertible bonds are nearing the end of their non-adjustment period.

As of September 26, only two new convertible bonds were announced: the Jin25 bond (2 billion yuan) and the Yingli bond (1.5 billion yuan). The market remains cautious about strong redemption trends, with 13 convertible bonds undergoing strong redemptions in September. The overall strong redemption tendency remains relatively high.

Risk Warnings

1) Macroeconomic growth may fall short of expectations, which could affect investor sentiment and risk preferences, impacting convertible bond market valuations.

2) Significant fluctuations in the equity market could exacerbate volatility in the convertible bond market, posing risks to investors.

3) There is a risk of individual bonds being delisted due to unexpected fundamental weaknesses or negative sentiment surrounding the underlying stock.

Conclusion

In summary, as we approach October, the convertible bond market shows promise for further upward movement, particularly in high-priced and equity-biased strategies. Investors should remain vigilant in observing market trends and adjusting their strategies accordingly to capitalize on potential opportunities.