Asian bond markets are growing in popularity
HONG KONG investors are increasingly turning to bonds as an alternative to jittery stock markets and bank accounts that offer returns that are easily outpaced by inflation.
But experts say bonds are one of the least-understood asset classes available to local investors.
This is because Asian bond markets are still an emerging sector compared to their well-established equivalents in the US and Europe.
But accelerating development across Asia and massive revenue-hungry projects mean the bond market is growing rapidly.
The term 'bond' refers to a fixed-interest debt security issued by either a government or a corporation.
While governments are the biggest issuer - they account for about 60 per cent of the world's total - possibly the best-known variety are junk bonds.
Disgraced former financier Michael Milken made them famous in the heady days of the bull market in 1980s.
But, behind the hype, they refer to a higher yield, lower quality corporate issue.
Bonds are effectively an 'IOU' offering a fixed rate of interest and are repayable at a fixed price and date in the future.
This differs from a bank deposit where the rate of return on a call account can be varied at any time.
In addition, bonds and securities can be bought and sold in the market place.
World bond markets have a total capitalisation of about US$16 trillion (HK$123 trillion) - about $7 trillion more than the world's equity markets. Daily turnover is also around three times more than that of equities.
Bonds can be traded like shares on world markets but the factors influencing their price will vary.
Like an equity, prices can be moved by anticipated rises or falls in the actual price.
The factors that bond dealers are looking out for are anticipated movements in inflation and interest rates, changes in the credit rating of the issuer and the volume of bonds being issued.
An investor considering an investment in a bond will need to consider the yield and prices. A bond pays a fixed amount of interest, or coupon, for each 'nominal' unit in issue.
So, if dollar bonds are issued in units of $1,000 and the coupon is 9.5 per cent, it will pay an annual dividend of $95.
But because bonds are traded in the market their value will move above, or drop below, their nominal price. The yield will need to be adjusted accordingly.
Dudley Howard, managing director of Guinness Flight Unit Trusts said if equity markets were vulnerable, 'why take the risk of investing in them until you are sure? There is too much uncertainty with equities and people are fed up with the volatility'.
Guinness Flight offers investors funds which enable risk to be spread across a range of bonds rather than concentrated in one sector.
'Investors are beginning to understand that it might have been better to make between 10 per cent and 15 per cent last year on bonds than lose 20 per cent on the stock market,' Mr Howard said.