Ideas in action – China tech sector underperformance has likely bottomed

Dec 12, 2022

We are following up on our idea expressed in previous comments that convertible bonds offer an attractive way to position for a Chinese recovery.

The latest performance of the China tech sector seems to vindicate this view. The original market response to the National Party Congress in October was negative.

However, in November, a series of new policy measures to ease the Zero-Covid policy, improve financing conditions and loosen the regulatory pressure on the tech sector, triggered a sharp recovery. The tech sector was at the forefront of the move and convertibles have benefited greatly.

It suggests we could finally see a re-rating in a market segment that offers historically cheap valuations. We expect the asset class and our strategy to benefit from this improving sentiment.

Short-term performance comparison around the National Party Congress (in USD)

Short-term performance comparison around the National Party Congress chartSource: Bloomberg, BlueBay Asset Management. Daily data from 16 August 2022 to 30 November 2022. Indices used: NASDAQ Composite and CSI Overseas China Internet (US-listed Chinese internet companies).

Outlook

Macro uncertainty and a potential downside earnings revision cycle remain key risks, which seem at times under-appreciated by markets. We expect volatility to remain elevated. As we have argued many times, this type of environment is supportive of convertible bonds. Recent market dynamics suggest that sentiment has now turned and that more market participants are turning positive on the asset class.

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