During the week of 20–24 November, in the vibrant heart of East Asia, I had the opportunity to immerse myself in the stories of nine distinguished companies located in Tokyo, three in Seoul, and seven in Hong Kong, each of which had an outstanding convertible bond.
This fast-paced journey left an indelible mark on my soul, a week of romance with the future shaped by these forward-thinking innovative firms on hot topics such as AI, electronic vehicles and batteries, robotics, green steel, renewable energies, video gaming and fintech.
It was helpful to value the potential growth that new technologies promise, even though the outcomes are uncertain. In this note, I’ll share my reflections from these meetings and provide an overview of the Asian convertibles market.
Japan
Japan’s contemporary corporate landscape is experiencing several notable developments. One prominent aspect is the emphasis on intergenerational management transfers, reflecting a strategic shift in leadership across various age cohorts within organisations. Concurrently, the Tokyo Stock Exchange (TSE) is pushing businesses that are trading below book value to disclose their policies and specific initiatives for improvement.
Within this context, there is a growing focus on value-driven capital allocation, as businesses in Japan increasingly allocate financial resources towards endeavours aligned with broader strategic objectives, creating sustainable value for stakeholders.
Many discussions during my trip were focused on ways to enhance return on equity, such as reducing excess cash and unwinding cross holdings, boosting operating business profitability, concentrating on core operations and divesting failing subsidiaries. With nearly half of TSE stocks trading below book value, these microtrends can have a significant impact on Japanese equities, particularly companies with low valuations in sectors like banks, energy and steel. As such, we would expect to see an increase in share buybacks, particularly from Japanese corporates whose cash reserves are elevated.
South Korea
Due to ineffective capital allocation by management teams and historically weak corporate governance policies, the South Korean stock market may be among the least expensive in the world.
The country, however, understands the geopolitical shift that is taking place and is trying to draw in international companies that are diversifying their global value chains away from China. As such, the nation has been actively working on adopting global best practices.
There was also a noticeable effort from the companies we met to align corporate governance with international standards to increase global investor confidence by improving their capital allocation strategies.
For many Korean businesses, the use of AI and robotics provides a crucial competitive advantage that supports the country's top exports, which include batteries, cars, and semiconductors. Among others, we visited a company involved in producing cathodes, anodes, electrolytes and separators necessary to produce battery cells. These cells are a key element in the global adoption of electric vehicles.
From our interactions, it appears that what is most important in South Korea is to identify if management teams are emphasising the need to align themselves with minority shareholders.
China
Hong Kong's standing as a financial and business hub has suffered because of a fall in public trust in the rule of law brought on by the 2019 protests and government measures. This explains why many expats moved to Singapore or returned to England.
At the country level, the world's second-largest economy is currently experiencing significant turbulence, with sluggish growth, youth unemployment, declining fertility rates and a property crisis. However, it feels that misperceptions are feeding a false narrative on China and the current slowdown in China looks more cyclical than structural.
Beijing plans policy adjustments to support an economic recovery in 2024 and is expected to make concerted efforts to spur domestic demand. Additionally, we are seeing growing demand for travel and tourism, and we heard that the industry destocking cycle could end next year as firms reduce inventories. This should promote wage increases and job creation.
At the company level, most companies we met have reported strong corporate earnings in recent quarters and some are beginning to repurchase their own shares by taking advantage of low prices.
Overview of the Asian convertibles market
Asia, including Japan, accounts for about 16% of the global convertible bond market, at a total value of USD64 billion across 160 issuances. Chinese offshore issuers, including companies listed on the US stock market, dominate the Asian weighting, representing 39.6% of the total, followed by Japan at 30% and South Korea at 9.1%. Singapore, Taiwan and Australia complete the dashboard at 7.8%, 5.1% and 3.1% respectively.
From a sectorial standpoint, consumer discretionary emerges as a vibrant force at 20.6% and IT follows closely at 17.1%. Industrials and materials sectors showcase the robust foundation of manufacturing in these economic hubs, contributing 16.5% and 13.9% to the region, respectively. Other sectors like communication services, financials and real estate add further dimension to the narrative, each contributing different colours to the canvas to a lesser extent.
Total issuance in 2023 reached USD10.5bn with 31 new papers – a significant increase compared to 2022, where volumes were three times smaller. As a refinancing tool for expanding businesses, convertibles may benefit from this general trend in 2024.
We believe the asset class offers investors an attractive risk-controlled vehicle to gain exposure to this dynamic economic ecosystem of East Asia, where a mosaic of industries collaborates to shape the region's business future.
