What’s happened to the retail bond market? (Part 1)

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RETAIL bonds have not generated much interest since they were launched in January 2013. So far, there has only been one issue — the DanaInfra Nasional Bhd RM1.5 billion sukuk — of which RM300 million was allocated to retail investors as Exchange Traded Bonds and Sukuk (ETBS) on Bursa Malaysia. These bonds are guaranteed by the government.

The market has not seen a follow-up listing of debt securities even though the government has been talking about listing Malaysian Government Securities (MGS) on the ETBS this year.

The ETBS was meant to kick-start participation from retail investors on Bursa, as the bourse aims to increase accessibility to bond and sukuk markets. It was heralded as a step in the right direction as it would allow retail investors to access a market that traditionally has required large sums of capital, which made it off-limits to everyone but high net worth investors and institutional players. 

With the ETBS, investors could buy or sell bonds that were listed on the bourse with as little as RM1,000, thus increasing investing options for retail investors while simultaneously growing the liquidity of the bond market. 

“Its debut will spearhead the listing of ETBS, providing an additional and cost-effective method to raise capital as well as providing domestic and foreign investors price transparency and flexible access to the stability of bonds and sukuk,” Bursa Malaysia Bhd CEO Datuk Tajuddin Atan said at the launch of the first retail bond issue in January 2013. 

However, response from the investing public has been tepid thus far. The DanaInfra ETBS’ charts on Bursa’s website reveal that there is almost no trading most of the time. And on days where there is, only 1,000 to 1,500 units change hands. 

“We attribute the lacklustre trading performance in the ETBS market to retail investors’ unfamiliarity with the bond market,” says Nor Zahidi Alias, associate director of economic research and chief economist at Malaysian Rating Corp Bhd (MARC), a debt rating agency. 

“In other words, retail investors are still not very comfortable investing in bond market instruments, as opposed to equities. There is still a knowledge gap to be filled,” he points out.

It is interesting that Malaysian investors are more hesitant when it comes to fixed income investments as bonds are considered to be a safer asset class than equities. This reflects a lack of understanding of the different asset classes and how they function. 

Wong Chee Seng, a foreign-exchange and rates strategist at AmBank Group Bhd, agrees. “Malaysian investors tend to look at absolute returns when it comes to their investments, as opposed to risk-adjusted returns. When you use risk-adjusted returns, you take the risk-to-reward ratio into consideration. A fixed income investment could give you a better risk-adjusted return than stocks, which are riskier assets.”

Even riskier assets are slowly losing appeal among retail investors, which could be part of a larger problem. It is no secret that besides properties, Malaysians have had a long love affair with stocks. But recent numbers suggest that this interest could be waning. 

According to Bursa’s figures, the number of new Central Depository System (CDS) account openings have decreased compared with previous years. The 136,303 new CDS accounts last year were the lowest in the last eight years. 

This, coupled with a year-on-year increase in assets under management (AUM) in the wealth management industry, suggests that retail investors may have less faith in their own trading abilities and prefer to leave investing to professional asset managers. While this represents good news for the wealth management industry, it is less so for Bursa and its efforts to bring retail investors back to the market. 

Some market observers are of the opinion that the retail bond market is caught in a chicken-and-egg situation. There have been no ETBS issues owing to a lack of demand from the retail market, but at the same time, it can be argued that demand can only be created by corporates willing to take the first step to issue ETBS. 

“There is almost no demand whatsoever for DanaInfra’s exchange-traded bonds. The majority of my clients prefer to enquire about stocks, even though the commissions and fees for trading ETBS is similar,” says Khairul Anwar, a remisier at RHB Investment Bank Bhd. 

“In the primary market, one of the reasons for the lack of ETBS issues is the relatively small retail market, compared with over-the-counter (OTC) bonds,” says MARC’s Zahidi. 

“For example, the size of DanaInfra’s first retail sukuk of RM300 million is merely 1.5% of the programme limit in the OTC market. On top of this, the higher administrative costs involved in issuing ETBS to retailers, such as listing fees and interest distribution costs, are among the factors that cause corporations to shy away from raising funds via this market.”

This article first appeared in Personal Wealth, The Edge Malaysia Weekly, on May 25 - 31, 2015.