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With stock markets still mired in concerns over high oil and commodity prices, fallout from the crises in the credit and US housing markets, and concerns about a spreading economic slowdown, further bouts of market volatility are more than likely. That may well deter investors from investing in equity directly, but convertible bonds could be an attractive alternative.

Understandably, investors may worry about the drag of global markets. In the current difficult and volatile market environment, more defensive investors can “postpone” their equity exposure by opting for convertible bonds. After all, conversion is typically at a later date, lifting the chances of an eventual stock market recovery. Also, when shares plunge, convertible bonds typically hold up better since such falls do not affect their coupons or face value. Thirdly, bond yields are expected to come down, creating bond market upside.

Asian markets have particular attractions. When it comes to the growth outlook for Asia ex-Japan, the risk of a full-blown recession is low. It is true that economic growth in the region is likely to feel the pinch from the slowdown in Europe and the US, with trade in particular set to slow.

Inflation, here too mostly due to rising food and energy prices, is an issue in Asia as well, especially since food is a much larger part of household spending. On the upside, central banks have been taking action. While together with the troubles in the developed economies such monetary tightening may slow overall growth, we are talking about a deceleration from a high pace, not a drop into negative growth. Clearly, Asia’s long-term growth story is intact.

As for Japan, long seen as a laggard among the major developed countries, there are reasons to be optimistic. Equity market performance has been quite strong in recent months. Most Japanese banks have emerged relatively unscathed from the sub-prime and credit crises. The economy is proving particularly resilient, actually benefiting from higher global inflation and expanding trade with emerging economies.

Asian equities are fairly valued, if not cheap given the long-term growth perspective. Also, credit spreads do not reflect the relatively strong finances of most Asian companies. Asian financial institutions are generally in better shape than their EU and US counterparts. Since credit spreads are abnormally wide and equities are attractively priced, Asian stocks have clear upside if, for instance, the pressure on oil prices abates or data show that growth in emerging countries holds up better than expected.

In this climate, Asian convertibles in general should do well. The recent declines offer a medium-term buying opportunity. Since Japanese convertible bonds are more liquid than other Asian bonds, they provide an extra security buffer.

Saji Bac-Mitra is manager of the Fortis L Fund Bond Convertible Asia fund at Fortis Investments