Schroder Investments: Dealing with technology sector fluctuations with convertible bonds

The Zhitong Finance App learned that Schroder Investment published an article stating that after experiencing fluctuations in the technology sector this summer, the market focus may once again shift to an investment tool that is often underestimated — convertible bonds. The world invests about 400 billion US dollars in convertible bonds. This instrument combines the growth potential of stocks with the defensive characteristics of fixed income, providing investors with an attractive option.

Schroder Investment said that before the sudden warning in the stock market in July, the breadth of its market was narrow, mainly driven by several technology companies with huge market capitalization, while most companies had shown a downward trend, and stock prices were lower than their technical average. Although the performance of a few stocks seems less important to investors in a wide range of markets compared to most stocks, this distinction becomes even more critical considering the risks associated with participating in crowded exchanges.

Previously, after the collapse of the TechNet bubble, it was generally regarded as the “lost decade” experienced by global stock investors, yet convertible bonds provided a guarantee. At the time, a large number of technology network companies focused on rapid expansion and seizing market share, but there was no clear path to profit. The bubble began to burst as investors began to question the long-term viability of these companies. The shift in market sentiment has led to a sharp sell-off in technology stocks.

Schroder Investment said that the reasons for the bursting of the TechNet bubble include a lack of a sustainable business model, overvaluation based on speculative profit forecasts, reassessments by investors, and the Federal Reserve's tightening monetary policy. After the collapse of the TechNet bubble, compared to the global stock market, including the NASDAQ index, convertible bonds rebounded faster. NASDAQ investors saw positive returns only after the global financial crisis. The recovery of global stock markets has also been very slow, without taking inflation adjustments into account.

Although history doesn't repeat itself, similar situations often happen. Assuming that the overall financial environment remains favorable, central banks continue to provide sufficient liquidity, and can avoid or delay credit events, then capital is likely to shift from overcrowded technology transactions to other industries. Companies that are difficult to attract liquid capital in the traditional corporate bond market may choose to issue convertible bonds to provide low equity and high coupon interest rates. Convertible bonds remained active during periods of insufficient liquidity, and initial signs suggest that the high-yield refinancing market is already facing challenges.

With the anticipated wave of refinancing and tightening credit conditions, convertible bonds have shown strong defenses against stock market losses. The main defensive attributes in the convertible bond market once again underscore the appeal of this asset class and the inherent protection it provides when the stock market falls.

During the stock market pullback period from the end of July to the beginning of August, the advantages of convertible bonds received attention once again. They have successfully protected against sudden losses in the market. Schroder Investment believes that if capital shifts from technology stocks to other industries in the future, convertible bonds may once again play a similar defensive role.