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Categories
| Is Malaysia ready for retail bond market? |
| Business & Market 2009 | |||
| Written by Fong Min Hun | |||
| Monday, 17 August 2009 11:28 | |||
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With the persisting low interest rate environment, the discussion about opening up the bond market to retail investors has been heating up, although not everyone is in agreement that it should be done. Criticisms range from the affordability of bonds to the complexities involved in bond trading, which can arguably be beyond the grasp of the average retail investor. Bonds, with their fixed return rates, are typically considered safer investing instruments than equities, although the relative ratings of the instruments must be taken into consideration. Moreover, the fact that the United States subprime and the eventual global economic crises originated from structured investment products has also cast further scepticism on the viability of opening up the fixed income market to the general retailer. Speaking to The Edge Financial Daily recently, Lee said the next major step forward for the local debt market would be to implement retail-side service. “The next big step is the retail bond market,” Lee said. “Typically, you don’t want to let retailers invest in credit ratings that are too far down the credit curve to protect them because they are not in the same position as a big unit trust or big fund manager to study the credit terms. “You would want to have some minimum standards and credit rating they can buy into. Having said that, once you allow them access into the bond market, the yield is much higher than bank deposits.” As with most other countries, interest rates in Malaysia have come off since the onset of the economic crisis. Presently, the 12-month rate for fixed deposits in almost all major banks has been set at 2.5%, 50 basis points higher than the benchmark overnight policy rate (OPR) set by Bank Negara Malaysia. Although the stated return of Malaysian Government Securities (MGS) might not be that much higher than FD rates — the three-year benchmark MGS maturing on August 2012 has a coupon rate of 2.509% — investors could see greater returns through the trading of their bondholdings. Moreover, there is an argument to be made that the papers of some corporates, or private debt securities (PDS), which are highly rated — AA or higher — are safer investment instruments than some of the equities available on Bursa Malaysia presently. In addition to better returns, access to the bond market also allows retail investors to diversify their investment portfolio, which is presently limited to the equities market, unit trusts and banking products. “In countries where savings rates are very high, there’s a need for it,” Lee said. “In the US, where the country’s savings rate is very low (about 6%), you don’t need it — you can route it all through the mutual funds. The individual deposits in the bank system here are about RM500 billion.” There have been some criticism from certain quarters that retail investors simply cannot afford to invest in bonds, which are presently sold in RM5 million denominations. While the process of dividing up the denominations might be straightforward, Malaysian Rating Corporation Bhd (MARC) CEO Mohd Razlan Mohd said the cost might be prohibitively high. “It’s a function of cost. At what cost do you want to open it up? In theory, we should let the bonds be traded in smaller denominations. But the cost might be prohibitively high to divide up the bonds and it would become costlier for bond issuer who has to pay Bank Negara Malaysia to maintain the system,” he said. Razlan added that existing bond funds already provided the same kind of diversification and exposure to bonds, although he cautioned that the viability of those funds would depend on the bond manager. Lee demurred. He said the bond market did not need to incur additional costs, but could use the same existing platform of the equities market. “When you develop a retail bond market, you don’t want to create unnecessary costs. Just piggy-back on the stock exchange infrastructure and use the same platform. Instead of quoting equities, you list the bonds there. Instead of dividends, you have a coupon. Singapore to some degree has done this, which has worked quite well.” Hong Kong and Singapore currently have a system that allows the purchase of bonds denominated in one thousand units of their local currency through automated teller machines (ATMs). The banks providing the service take a cut from the transaction, of a few basis points, as their service fees. Supporters of the move also say that the introduction of retail investors will lend greater depth to the bond market as it provides greater diversification in the investor base. This would then boost stability and allow for greater trading in the secondary market, which will also improve the pricing mechanism. Currently, only high net-worth individuals with RM3 million or more can directly purchase bonds. The fact that retail investors are interested in purchasing bonds is plainly evident from the overwhelming response to the RM2.5 billion three-year Sukuk Simpanan Rakyat issued by Bank Negara Malaysia in January, which was fully taken up within two days. This article appeared in The Edge Financial Daily, August 17, 2009.
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