China Onshore
The macro economy has remained stable recently. May’s manufacturing investment and consumer retail monthly growth were at historical high levels, and real estate sales saw modest uptick. However, real estate investment and industrial manufacturing remained lackluster, with a slight decline for seasonally-adjusted Manufacturing PMI in June.
Against this macroeconomic backdrop, the bond market remains underpinned by fundamental factors, while the bond yields continue to decline with ongoing allocation demand. Overall, we maintain that the bond market has ample liquidity and still presents investment opportunities for the mid-to-long term. However, the market has become more uncertain due to the previous rapid drop in bond yields and the current low yield environment. Portfolio with longer durations, in particular, should employ more flexible investment strategies to navigate market fluctuations.
Haitao Zang
In July, the bond market’s primary focus is on fundamental and policy shifts.
Economic fundamentals extended trends of the previous months - lagging domestic demand and steady export demand. Despite various supportive policies, the real estate sector’s recovery was still lagging behind expectations. The economic rebound that should be based on moderate inflation, requires further enhancement. Export, while facing uncertainty, is expected to sustain its current trajectory. Such stable economic fundamental expectations would hardly induce a sharp uptick in bond yields.
Market volatility will primarily be driven by policy changes, including fiscal support adjustments, the execution of monetary policy, and actions affecting bond yields and short-term liquidity. In the current low-yield environment, investors are particularly sensitive to market fluctuations, and the same-sided trades could amplify the volatility. Overall, the market is expected to fluctuate around low yield levels.
Accordingly, our strategy is to follow the bullish trends, strategically adopt a spread strategy on credit bonds, and maintain robust liquidity in case of unexpected market fluctuations.
Xin Tian
Currently, convertible bonds present promising investment opportunities. The premium of convertible bonds is at a six-year low, and the yield spread between convertible bonds and straight bonds is at an all-time high. From the perspective of fundamental analysis, the impact of stock market volatility on convertible bond has significantly diminished. However, investors are demonstrating extreme negative views towards the credit spread of convertible bonds, resulting in impulsive stop-loss trading and herd behavior. The pervasive anxiety on the credit risk has stripped convertible bonds of any optimistic pricing, and has excessively discounted the valuation in anticipation of negative scenarios.
Returning to rationality and common sense, now is a timing to considerate for contrarian investors to position on convertible bonds. Convertible bond show an asymmetric loss-return feature with mean-reversion tendency. Establishing position at market lows can lead to a more optimistic outlook on future returns. Echoing the quotes from Howard Marks, “Not being willing to take risks is an extremely risky strategy”.
