MARKET COMMENTARY
Most of the market activity in March can be summed up in two words: tariffs and Germany. There were clearly other forces at work, but the effects of the first 5% of Donald Trump’s second mandate on global trade, risk asset performance, sentiment and international relations have been keenly felt, with ripples progressively spreading to all corners of the investable universe. In the US, the initial euphoria after the elections has dissipated in the face of an administration which appears to be indifferent to the risk of a recession. Tariff-induced upward price pressure could lead to stagflation against a backdrop where lofty valuations are reliant on robust underlying growth. There is one possible glimmer of hope for investors who had pinned their hopes on the US driving global growth in 2025 – if the gradual roll-out of tariffs proves to be too punitive, President Trump could be amenable to negotiation and order could be restored.
Thankfully other drivers of performance have come into play as the US wobbles. Better performance in Europe – a relative underweight for many in 2024 – has soothed many worried brows. With the suspension of the debt brake in Germany and infrastructure spending plans akin to those post-reunification, Berlin has removed the fiscal drag that has weighed on Europe for more than a decade. If the European domestic growth engine starts firing on all cylinders, the region could deliver above-trend growth, leading investors to reallocate while boosting valuations. Chinese stocks have also done well year-to-date, driven by strong underlying profits, enthusiasm over the development of AI in the region, regulatory relief and better sentiment. Recent data suggest there are some green shoots in the economy (even for the property market) and that Beijing is becoming more business-friendly, although the geopolitical situation remains tense.
There has been good news for convertible bond investors so far in 2025. As we saw in 2024, convexity is back and has largely protected investors during the turbulence of the past few weeks. The Fund largely outperformed the MSCI Asia ex-Japan index and participated with 65% of the performance of the underlying share basket.
NEW ISSUANCE
Issuance volumes rebounded strongly in March as USD 13.3 billion in new deals came to market. The US led the way with USD 8.2 billion, followed by Asia with USD 3.7 billion and Europe with USD 1.4 billion. The sectors and structures were well diversified, with deals from the Healthcare, Financials, Technology, Consumer Cyclicals, Utilities and Materials sectors across regions. There were large mandatory deals in the US from KKR and Microstrategy, repeat issues in Europe for Iberdrola and TAG Immobilien and a USD 2 billion issue in Asia from Baidu, exchangeable into shares of online travel management provider Trip.com.
PERFORMANCE
The Fund lost 0.3% in March, 90 bps behind the benchmark index. The JPM JACI Core 1+ index fell 0.1%, the MSCI Asia ex-Japan equity index was flat, the VIX index of volatility rose above 20% and globally, Value outperformed Growth by over 9%. The share basket underlying the benchmark index rose 0.1%. This brings quarterly returns to 4.0%, behind the benchmark index return of 4.8%. The rates effect was positive, but equity and volatility detracted. By region, Asia fell 0.45% and Europe added 0.5%.
Materials (+1.4%), Financials (+0.2%) and Pharmaceuticals rose, but the other sectors detracted – Technology -1.7%, Consumer Cyclicals -0.2% and Communications -0.2%.
Returns in Materials were driven by China Hongqiao (+88bps) and Zijin Mining (+53bps) on hopes that stronger growth in China will spur a recovery in infrastructure projects. There we no detractors and China Hongqiao added 3 bps relative. In Financials, Far East Horizon, new issue Qifu Technology and Ping An all contributed, and in Pharmaceuticals, Wuxi Apptech added 5 bps, although the underweight marginally detracted from relative returns. Performance in the Technology sector was mixed, with gains (absolute and relative) for Samsung Electronics and VNET Group but weakness across almost all the hardware (Lenovo, Quanta Computer, Xiaomi, Wiwynn, Gigabyte) and semiconductor names (SK Hynix, TSMC, Hon Hai Precision). In relative terms, Lenovo, Hon Hai, Quanta, SK Hynix and Xiaomi were the main detractors. In Consumer Cyclicals, Delivery Hero added in both absolute and relative terms. The consumption names were the other strong performers (Anta Sports, online platform Meituan, auto retailer Zhongsheng Group, hotel operator H-World and casino/resort giant Wynn Macau). Only travel agent Trip.com and home products retailer Miniso detracted. Miniso shares have lost almost a quarter of their value since the beginning of the year. Although the more domestic-focussed consumption names have performed well, Miniso has more exposure to the US and, with the looming threat of tariffs, the shares traded lower on fears of the potentially negative effect on revenues.
OUTLOOK
During the recent market moves, convertible bonds resisted well as many of the main share indices traded lower. Convexity remains positive and the asset class exhibited limited participation in the equity downside in March. Issuance remains strong. We maintain our bias to quality credits and profitable growth companies across sectors, as well as the investments in themes aligned with government policy and our growth outlook for 2025. We have used periods of strength to lock-in profits and periods of weakness to add to exposure. We believe that convertible bonds are an all-weather vehicle which acts as the bridge between bonds and equities and can help investors navigate the markets in turbulent times.
