Bonds for all investors
Move to liberalise market will allow retail players to diversify their investments
ORDINARY Malaysians could earn higher returns on their funds if the Securities Commission’s (SC) plan to allow retail investors to participate in the wholesale bonds and sukuk market materialises.
This would mean that anyone with extra funds can opt to invest in the wholesale bond and sukuk (Islamic bond) market, which has been available only to institutional investors and high net-worth individuals all these while.
The possible relaxation of the wholesale bond market’s regulations could excite risk averse investors, as bond investing typically offers higher real returns as compared to the conventional fixed-deposit approach.
With the liberalisation, banks will be able to offer bond and sukuk products to retail investors in smaller bite sizes, which could range from RM10,000 to RM100,000, depending on the decision of the banks offering the product.
Generally, Malaysian banks offer interest rates ranging between 3% and 4%, depending on the duration of the fixed-deposit facilities. The longer the term, the higher the return.
On the other hand, bonds usually offer yields which are higher than most fixed-deposit options in domestic banks, even after taking inflation into account.
To put it into context, the Malaysian bond and sukuk market is valued at RM1.3 trillion, of which government and sukuk account for 54% of total issuance. The remaining balance are corporate issuance.
Nearly 97% of corporate bond and sukuk investors are from the domestic institutional market.
The Malaysian bond and sukuk market is the third largest in Asia (relative to gross domestic product). Malaysia also has the world’s largest sukuk market.
Currently, although a retail bond framework already exists, bond and sukuk issuers prefer to issue their papers in the wholesale bond market where only institutional investors and high net-worth investors are able to participate.
Given the fact that Malaysian retail investors have never actively participated in bond investing, retailers could possibly be able tap into the enlarged opportunities in the wholesale bond and sukuk market if related regulations are relaxed by next year.
SC chairman Tan Sri Ranjit Ajit Singh says that the initiative is part of a two-track approach, under which the SC will further liberalise rules to enable greater retail participation in the corporate bond and sukuk market within the first three months of 2018.
Essentially, the move will enable firsttime bond and sukuk issuers to issue their papers to retail investors directly, and retail investors to gain direct access to the secondary bond and sukuk market, subject to the conditions or safeguards determined by SC.
“The whole idea is to encourage much more retail participation in our RM1.3 trillion bond and sukuk market, and to be able to provide more investment opportunities for Malaysians,” Ranjit said at a press conference earlier this week.
The move will also allow the capital market to benefit from Malaysia’s high savings rate, which has largely been confined to ordinary saving accounts and fixed deposits to date.
According to the latest available data from World Bank, Malaysia’s gross savings rate in 2015 stood at 28% as a share of gross domestic product.
Notably, this is higher than Japan’s and the United States’ gross savings rate of 27% and 19%, respectively, two years ago.
Actually, it is understandable as to why Malaysians prefer fixed-deposit options rather than bond investing, given the latter’s more complex structure.
It is relatively easier and simpler to put one’s funds into a fixed-deposit account as compared to investing in bonds from the open market.
Apart from that, the bond market is open to price fluctuations, mainly due to the result of changes in benchmark interest rate and the demand and supply of bonds in the market.
On the flip side, bonds provide periodic interest payment, which is generally higher than returns on fixed deposits, apart from repayment of principal at the end of the maturity.
Investments into the bond and sukuk market allow capital preservation and offers a predictable stream of income. One can choose to invest in short, medium or long-term bonds, depending on his or her investment time horizon.
Bond investing may be suitable for those who are risk averse and prefer to diversify their investment portfolios, yet wanting to earn positive real returns on investment after factoring in inflation.
Despite its openly traded nature, bonds are by large safe with low default rates over the years in Malaysia.
As per figures from RAM Ratings, corporate bond default rate last year stood at only 0.5%, following no recorded defaults since 2013.
The only time corporate bonds’ default rate breached the 9% mark was in 1998 in the aftermath of the Asian financial crisis.
It is still to early to see whether SC’s plan to liberalise the wholesale bond and sukuk market will excite retail investors, given the reluctance in bond investing in prior years.
However, the move could allow more interested retailers to diversify their investments in search of higher returns.