DURING the bull run days of the early 90's, one would have considered it somewhat déclassé to even mention something as unsophisticated as the bond market.
It was the equity markets that were offering the hottest ticket to the promised land of unparalleled wealth.
Thus if your money was not invested in equities, it was nowhere at the time.
But like all trends, this too has come to pass.
Rather than déclassé, bonds are now de rigueur among the local investing fraternity. Though still in its infancy, this is one industry that has benefited from the shakeout that followed on the heels of the 1997-98 Asian financial crises.
According to industry observers, the local bond market has more than doubled in size in the five years since the 1997-1998 Asian financial crisis.
Ironically, investors who had been burnt in the stock market looked to other investment instruments in which to pour what little money they had left.
In the bond market is where they found a safe haven.
The general malaise that has afflicted equity markets in recent years, coupled with the historically low interest rate environment, has also lent support to this growing trend.
But what about the fact that the local equity market has attracted a fair bit of interest since the start of this year, fuelled mostly by the knowledge of a RM10 billion index-linked investment fund's presence in the market?
Could this signal the end of investors' love affair with bonds?
Not quite, according to observers. For starters, it remains to be seen whether the current rally witnessed on the Kuala Lumpur Stock Exchange will be sustainable.
OCBC Research, for one, believes that the sustainability of any market rally is questionable as fundamentals of the geo-political and economic conditions have not changed at all.
As such, the research outfit reckons that while Valuecap Sdn Bhd will have a short-term positive impact on the stock market, investors should nevertheless be watchful of what it terms as relief-rallies.
Worth noting is that the benchmark Composite Index (CI) was chased up to a high of 808 points in April last year only to lose steam and spiral downwards soon after. In the end, the equity market ended 2002 on a dismal note at 646 points – 50 points lower than it was at the start of last year.
HSBC Bank Malaysia Bhd's associate director for fixed income research Devendran Mahendran admits that recent years have seen an inverse correlation between the equity and bond market.
“This is now the case because of the expectations on the economy. But it doesn't necessarily always have to work out this way,” he says.
But with the threat of a US-led war against Iraq still to be considered, Devendran reckons a fair number of risk-averse investors will continue to shy away from the more volatile equity markets to seek cover under safer investment instruments like bonds.
He expects the growth rates for the bond market to be moderate this year and foresees significant bond issues particularly for infrastructure development.
The growth of the market will be reflective of the pace of economic activity in the country, adds Devendran.
Commerce International Merchant Bankers (CIMB) Bhd's senior vice-president for debt markets research Andrew Leong says that the bond market can expect to see growth of about 17 per cent, or approximately RM40 billion of new bond issuance, this year. The supply pipeline is strong, he claims.
In recent years, there have been several major drivers of the bond market. Leong says, they include:
·Ample liquidity in the banking system;
·Greater awareness among regulators of the need to develop the bond market to reduce systemic risks on the banking sector;
·And the issuance of Danaharta, Danamodal;
·And more Malaysian government securities (MGS) to extract non-performing loans in the banking system;
·Recapitalising of selected banks;
·And spending drive in the domestic economy.
Going forward, Leong says the prospects for growth appear to be just as upbeat now that the obsession for pure capital appreciation is a thing of the past.
Rather, investors are increasingly seeking the stability of cashflows offered by bonds, he says.
In addition, larger institutional investors now typically determine that a percentage of their total investment portfolio be invested in bonds. This could range from 30 per cent to 40 per cent.
This bullish outlook is backed by Rating Agency Malaysia Bhd, which reckons that the year will see more companies turn away from bank loans to seek cheaper funding in the private debt securities (PDS) market.
HSBC's Devendran points out that the bond market has proven to be an efficient form of borrowing for companies with high credit standing.
As a result, the PDS market, which was smaller than that of MGS in 1997, has now overtaken the latter both in terms of size and variety.
At end 2001, the size of the fast growing PDS market, which registered a compounded annual growth rate of 30.2 per cent, stood at RM133.6 billion, compared with RM103.4 billion for MGS.
CIMB's chief executive officer Nazir Razak had predicted earlier this month that the fund raising through the PDS market would grow 17 per cent to RM40 billion this year from RM32 billion in 2002.
In contrast, he expects funds raised through the equity market to dip two-thirds with initial public offerings falling to RM4 billion this year from RM12 billion in 2002.
CIMB's Leong says more companies are likely to turn to the bond market to raise funds as it has proven to be cheaper and more cost-effective for the larger corporates to tap institutional investment funds directly via the bond market rather than have banks act as intermediaries.
Furthermore, the incentives provided under Budget 2003 for Islamic bond issuance has also heightened the appeal of this particular debt instrument, the demand of which has grown from only 7 per cent of total bonds raised in 1999 to 36 percent in 2001.
Looking ahead, Leong reckons that trading activity in the bond market will be focused on AA and selected single A rated bonds. HSBC, meanwhile, recommends over-weighting on locally rated AA and AAA rated bonds as it claims these are likely to benefit from investors' search for incremental returns.