Asian convertible bonds for long-term growth, innovation and attractive metric
key takeaways.
- A structural transformation of Asian economies is driving long-term growth, led by innovation and a decoupling from the US
- Convertible bonds in the region offer investors asymmetric returns, diversification, favourable valuation metrics and supportive new issuance trends. Liquidity, positive sentiment and policy support are creating attractive entry points
- Featuring dedicated expertise to Asia, our benchmark-aware, long-only strategy is designed to capture equity upside while protecting capital, with a focus on strong Asian issuers and potential currency appreciation.
Asia is undergoing a profound economic transformation, marked by a strategic decoupling from the US and a pivot towards innovation-led growth. For professional investors, the evolution presents compelling opportunities, particularly through Asian convertible bonds, which stand out as a strategic vehicle to access this transformation, offering equity-like returns with embedded downside protection, portfolio diversification and attractive metrics.
Structural shifts: from manufacturing to innovation
The decoupling of Asian economies from US-centric growth drivers is reshaping the region’s economic architecture. China exemplifies this transition, evolving from a global manufacturing hub (or being ‘the world’s factory’) into a self-sustaining innovation ecosystem. The emergence of DeepSeek1 and the rapid development of electric vehicle (EV) and biotech industries underscore China’s technological ascendancy.
Government support and advances in artificial intelligence are further boosting the Chinese tech sector. Meanwhile, strategic industries across Asia – such as semiconductor and electronics firms in Taiwan and South Korea – are poised to benefit from the global technology investment cycle, despite ongoing export volatility and geopolitical tensions.
Conducive short-term conditions
Short-term market conditions are conducive to investor participation in Asia’s structural transformation. Liquidity injections have buoyed equity markets in mainland China and Hong Kong, a softer US dollar is supporting regional risk assets while measures to combat involution are accelerating in key sectors. These tailwinds, in our view, outweigh near-term headwinds including ongoing tariff uncertainty.
Investor sentiment has notably improved since late 2024. Chinese retail investors have re-engaged with equities, driven by limited alternatives, maturing fixed income products and renewed optimism. Positioning remains light, suggesting room for further inflows. Additionally, a historically weak yuan enhances export competitiveness, while fiscal and monetary policies continue to support domestic consumption.
Why choose convertible bonds for Asia?
Asian convertible bonds offer a compelling blend of equity upside participation and downside protection. Over the past decade, they have captured more than 90% of equity market gains with less than half of the associated volatility2. This convexity makes them particularly attractive in uncertain market environments.
From a portfolio construction perspective, Asian convertibles provide diversification across issuer profiles, sectors and geographies. Notably, nearly half of issuers have no other public debt, and over 60% of exposure lies outside China3. Compared to regional equity indices4, Asian convertibles offer greater exposure to China, Materials, Consumer Discretionary and Real Estate, and less exposure to India, Taiwan, Financials and Staples.
Attractive financial metrics
Asian convertibles are attractively valued relative to Asia ex-Japan equities across key metrics including price-to-earnings, Enterprise Value (EV)/EBITDA, EV/Sales and price-to-book, as shown in Figure 1. Furthermore, Asian convertibles also benefit from a superior outlook for sales and earnings growth (Figure 2).
Fig. 1. Asian convertibles are attractively valued vs Asia ex-Japan equities on all metrics5
Fig 2. Asian convertible bonds: an advantageous sales and earnings growth outlook5
Performance data over 3-, 5- and 10-year periods show Asia-Pacific convertibles outperforming both credit and equity strategies on an absolute and risk-adjusted basis6. This resilience underscores their role in capturing growth while mitigating volatility.
Abundant new issuance in the region
Primary issuance in Asian convertibles rebounded strongly in 2023 and ranked second globally in 2024, with USD 29 billion raised year-to-date7. High-quality issuers such as Alibaba, Xiaomi, Ping An and JD.com8 have tapped the market, enhancing the investable universe. We expect issuance to continue on investor-friendly terms, adding further convexity and diversification to portfolios.
Fig 3. Primary market issuance in Asia, 1998-20259
Why PUTNAM for Asian convertibles?
PUTNAM has been a market leader and innovator in the convertible bond asset class since 1987. Our Asia ex-Japan strategy was launched in December 2008 and is the largest in its peer group. It is a benchmark-aware, long-only convertible bond product aiming to deliver outperformance versus the reference index over a market cycle. Our investment team has a highly experienced specialist on the Asian market, Larry Pun, who co-manages the fund with the CIO for convertible bonds, Arnaud Gernath.
The Asian portfolio reflects the asymmetry of the asset class and captures equity upside potential while protecting capital during downtrends. It is biased towards issuers with strong credit credentials and sustainable long-term business models domiciled directly in Asia, or deriving a significant portion of their revenues from the region. There is no currency hedge versus USD - the portfolio participates in the potential medium-term appreciation of regional local currencies.
