What new initiatives is Bond Pricing Agency (BPA) Malaysia involved in?
AYOB: Going forward for the next year or so, we have two initiatives that we want to do. The first one is the EBPAM (Electronic Bond Pricing Agency Malaysia) Product Services. We are going to have the opportunity for everyone in the market, regardless whether they are students, to actually get data from our website because currently data from our site is only available wholesale, full time clients of BPA Malaysia. We realize the fact that no one has the ability or capacity to actually subscribe for one year contract with us to get all the data. We are now allowing people to go in and choose whatever information they want. They will pay for just what they need, so it is one kind of financial arrangement between buyer and BPA.Â A second initiative is another product, which is more for our professional clients, is called MIR (Market Implied Rating). What happens is many times the only way investors in the fixed income market know there is a change of rating is when there is an announcement by the rating industry. Now, the rating agencyâ€™s methodologies are solely based on traditional ways of looking at things, such as when information from the company gets published. With this information they will do the analysis and provide their views and opinion. However, we realize that there is one part of the market which can also give a good indicator of where the credit risk is, which is the market itself and how it reacts and how market trades in terms of the price. For example, and this is what you see in equity, you have the stockists who analyze the trends. Similarly, if the market starts to trend on this data and has priced some of this fixed income lower than what the rating indicates then that could imply, as far as the market is concerned, that for this particular asset, the risk has gone up. Market implied rating will provide an input where we will then be able to tell the user that the market itself is recognizing that this particular asset class is not at the rating level of what the rating agency says. You then have three options. Either, yes it indicates the right level what the rating agency says, it does not indicate the right level it is rated higher, or it is rated lower. This gives the user some lead time.
How have Ringgit dominated debt instruments fared in recent years compared to other Malaysian investment instruments?
AYOB: Malaysian fixed income market relative to our other asset class has now been performing better than what people expected. If you look at the last five years the Ringgit fiscal market actually grew by 23.4%. In comparison, Ringgit equity market it only grew by 23%. In terms of the two major financial asset classes, fixed income performed slightly better than equity in the five year time bracket.
What are you expectations for the Bursa Malaysia openings of the retail bond market?
AYOB: The retail bond market is something that has been planned for quite some time. It is actually stated in the Capital Market Master Plan II which was published by the Securities Commission last year. As a bond pricing agency we find that this is quite a positive direction to go. It introduces many more players and many more investors into the fiscal market. Prior to this, the only way a retail investor could have access to fixed income market is to invest indirectly via the mutual funds. Now, instead of going to an intermediary mutual fund, they can go in direct and buy the fixed income where they feel they want to hold if the rest they are willing to accept. This is good because it provides us with liquidity. Of course, the level of liquidity cannot be as much as wholesale because the wholesale market is in the multimillions. If you can have a thousand, ten thousand, or one hundred thousand potential investors, even at a minimal sum of MYR 10,000 ($3,300) per transaction, when you aggregate that is actually a huge sum of money. There is a huge sum of asset that has been transferred, so it is a very good thing.
How much appetite do you think there is on the part of retail investors to get into bonds?
AYOB: If you look at banking fixed deposit, there is a finite number of tenures you can invest in. If you put your money with a bank for one month you get about 3.2% back. Now, you can buy a Malaysian fixed security, whether it is five years or three years, once you buy these things you do not need to wait for one month. You can actually buy it today and sell it tomorrow, and there is minimum holding period. So immediately, for a retailer it becomes more profitable to actually look at this new asset class. When this is allowed many will start seriously looking at the possibility of transferring some of their fixed income or their fixed deposit savings into investing in fixed income.
Do you think the banks will respond by bumping up the rates?
AYOB: Well, it is a toss-up. If it is flowing out for the banking system and into the fixed income universe the banking system will then have to do something to attract some of it back which may be even better for the retailer. By virtue of this, it actually makes the retailers more profitable, regardless of what happens, because both parties (banking and the bond market) will have to start to manage expectations. As I see it, it can only be positive to the retailers.
Malaysia is very corporate driven in terms of how we issue. If you look at Thomson Reuters' BPM Liquid Mix Index for a duration of five years, the gain is about 31.1% in comparison with the government index which is only 22%. In terms of the potential for non-government issue, it is actually much higher than it is for government fixed income.
How have government issues fared in comparison with non-government issues in the near term? Do you expect that trend to continue?
AYOB: Looking at the fixed income market, non-government issues have outperformed the government issues. In Malaysia, a lot of the investments for ports, investment for infrastructure, and independent producers are done by private companies. A lot of the PDS (Private Debt Securities) for fixed income papers the agency issued out is actually issued out by private companies, in comparison to a country, which is more centralized in terms of how they manage finances. Malaysia is very corporate driven in terms of how we issue. If you look at Thomson Reuters' BPM Liquid Mix Index for a duration of five years, the gain is about 31.1% in comparison with the government index which is only 22%. In terms of the potential for non-government issue, it is actually much higher than it is for government fixed income.
What was the biggest impact of the debt crisis in Europe and the U.S. on Malaysiaâ€™s networks?
AYOB: We did a study for when the situation was happening in Europe and the U.S. Surprisingly, there is no correlation at all. For the equity market, there was some correlation, but for the fixed income market there was no correlation. Whatever affected that side did not affect Malaysiaâ€™s fixed income market. I think that, here in Malaysia, it is still a wholesale professional market. Every buyer and seller of bonds in Malaysia, behind each of them here, there is a minimum of four analysts that are working for then. They know they are buying not because of speculative purposes but they are buying certain papers because of the underlying risks. They want to have exposure in the independent power producer or want to have exposure to the port industry, so they will buy fixed income by port operators. A couple of months after the crisis in Europe, we started to see the Malaysian bond market growing. We saw a higher percentage of foreign shareholders of our portfolio.