MARKET COMMENTS
The year began with some heavy news flow; nevertheless, most risk assets closed a bumpy month higher despite escalating trade rhetoric, a possibly less certain path for interest rates and the DeepSeek shock, which temporarily caused investors to re-evaluate their lofty expectations for AI-generated returns. Markets gradually started to price in the inflationary effects of President Trump’s proposed policies, which pushed US 10-year yields back towards 5%. Trump signed a raft of radical executive orders, and the initial optimism gave the S&P500 an early boost. However, just after the inauguration celebration, an unexpected curveball hit global markets with the launch of DeepSeek, a lower-cost alternative to ChatGPT from China, wiping more than USD 600 billion from NVIDIA’s market capitalisation in one day and causing many names in the AI supply chain to plunge. Attention had been focussed more on the potential for the US cohort to generate significant medium-term returns, with most believing that US curbs on chip shipments and the sharing of technological know-how had been sufficient to put China out of the race, at least for now. The sell-off was painful but narrow and short-lived. Convertibles were largely protected from the downdraft, having only minimal exposure to Transactional Trump (e.g. traditional autos, luxury), and we used the DeepSeek air pocket to make some adjustments to our exposure.
In the midst of the AI angst, the US administration also announced tariffs on imports from Canada, Mexico and China, although discussions between Trump and some of the relevant premiers led to delays being negotiated. What this reinforced, if anyone had been under the illusion that Trump would not follow through on early promises, is that this new regime will lead to spikes in volatility, gains for some at the expense of heavy losses for others and a notably transactional skew to policy for the next four years. Proposals to buy Greenland from Denmark and make the Gaza Strip the new Riviera of the Middle East were met with derision, but they show the unpredictable nature of current geopolitics.
The prevailing sentiment of uncertainty made for a difficult start to the year for fixed-income investors. As well as the gap higher in US yields (before they moderated later in the month), Japanese yields also ticked higher. One beneficiary of the current environment is the gold price, which hit a record high last month. Inventories have risen 75% on the New York commodity exchange as traders hedge against a potential political shift in the US.
NEW ISSUANCE
After a strong year for primary in 2024, the new year got off to a slow start with just over USD 3 billion of issuance in January, driven exclusively by the US and Asia. The pipeline faced a number of headwinds, including Q4 earnings blackouts and US political uncertainty. Forecasts remain in the USD 80-100 billion range for the full year. In the US, Microstrategy issued a USD 730 million perpetual instrument and Vancouver-based gold producer B2Gold issued a USD 460 million deal with a 2.75% coupon. In Asia, electronic components manufacturer Delta Electronics issued a USD 525 million convertible with a 2030 maturity.
PERFORMANCE
The Fund returned 1.1% in January, 10 bps behind the benchmark. Over the same period, the JACI credit gauge added 0.6%, the MSCI Asia ex-Japan index rose 0.7%, the ITRAXX Xover credit index tightened from 313 bps to 287 bps and Value outperformed Growth (4.4% versus 2.6%). By region, Asia rose 1.3% and the European exposure generated a small gain. Both regions were marginally positive in relative terms.
All sectors ex-Financials generated positive returns, with the strongest gains for Technology +0.5%, Consumer Cyclicals +0.5% and Basic Materials +0.4%.
Technology was unsurprisingly a bit of a mixed bag. As the DeepSeek news broke, the Fund was overweight AI Phase 2 (infrastructure/value chain) and Phase 3 (adopters, users, creators who can monetise AI usage). Infrastructure (SK Hynix +71 bps and Delta Electronics +6 bps) did well, as did handset and equipment manufacturer Xiaomi, which added 41 bps. Xiaomi’s stock performance has been particularly strong since the stimulus package was announced in China in late 2024. The company has made a concerted push into the premium space for its telephony products and has made a strategic move into the production of electric vehicles. This is diversifying its broader offering and opening up the growing market for EVs in the region. Some hardware and storage names (Lenovo -19 bps, Quanta Computer -16 bps, Wiwynn -13 bps) did less well. In relative terms, the option position in TSMC detracted 7 bps.
The Asian Consumer Cyclicals were strong across the board (Alibaba +14 bps, Anta Sports +14 bps, JD.com +9 bps and Wynn Macau +6 bps). The jumbo deal in Alibaba, which was issued last year, has benefitted from the very strong performance of the underlying shares in 2025. Quarterly results were strong, the company’s e-commerce and cloud businesses have benefitted from both stimulus and the AI boom, and its strategy to attract cost-conscious customers during the year-end shopping season helped to drive strong sales. The off-benchmark position also added 14 bps to relative returns. The off-benchmark position in JD.com added a further 9 bps. The Communications sector was led higher by Kingsoft (+12 bps), which has also benefitted from a strong underlying stock performance, and in Materials, both China Hongqiao (+31 bps) and Zijin Mining (+6 bps) contributed as beneficiaries of stronger demand post-stimulus. The weakness in Financials was concentrated in the position in insurer Ping An (-26 bps) and not offset by a small gain for Far East Horizon.
OUTLOOK
After a strong year for the asset class in 2024, we forecast positive returns for convertible investors in 2025. Convertibles provide a bridge between the equity and fixed income worlds – they help to mitigate timing risk as they offer exposure to both and offer long-term optionality on names where the equity story is still unfolding, which is important in the current growth environment. Our base case is still for a soft(ish) landing, which would mean a contribution from equities, volatility (slightly higher overall volatility, but specifically periodic spikes as we saw in 2024), lower short rates, spreads unchanged and a benign default environment – a supportive backdrop for convertibles.
In terms of themes for 2025, we see performance potential for convertible bonds from: embracing growth, increased cryptocurrency adoption, increasing electricity demand, a positive geopolitical shift (more Chinese stimulus, America-First, lower rates in Europe, increasing capex), consumer strength (strong labour markets, lower rates, energy prices are contained) and the upside from higher M&A and performance broadening to smaller and mid-sized names, which are well represented in the convertible bond universe.
