This week, the Straits Times Index (STI) moved up 1.8% to 3287.43 points. This weekly gain brought its total gains for the year to over 14.1%. At the end of June, Deloitte released a report detailing a strong rebound in the Initial Public Offering (IPO) market with “blockbuster” listings in the pipeline in the second half of 2017, after already adding $2.14 billion in capitalisation to the Singapore market.
The global market has led this strength, with the Standard & Poors 500 (S&P500) notching a 1.4% gain, bringing its return to 9.85% for the year so far. We also like to use the Morgan Stanley Capital International (MSCI) All Country World Index (AWCI), an index made up of 23 developed markets and 23 emerging markets worldwide, as a gauge of the global market’s health. This week, this index rose 2.1%, further highlighting the market’s strength.
In Singapore, investors are able to buy retail bonds and retail preference shares to earn fixed income. Currently, there are 11 retail bonds and six retail preference shares listed on the local market, and you can find out more about them on the SGX website.
Many investors buy them as they think it is safer to investing shares. While this is true, there are certain key considerations that you have to think about before investing.
Some of the positives of being able to trade fixed income products such as retail bonds and retail preference shares is that investors have liquidity of buying and selling relatively quickly as well as buying such products at lower quantum of $1,000. It is also true that such financial products do not fluctuate as much as stock prices as companies are obliged to pay the interest no matter how it has performed.
Hyflux 6% PerCapSec (SGX: BTWZ)
On 27 May 2016, Hyflux, a water treatment firm, issued this retail bond paying an annual coupon of 6.0% when it raised $300 million. While many investors could be drawn by its attractive returns, especially in the low interest rate environment we are still in, there are reasons why companies pay these amounts – because there are proportionately significant risks involved.
Some other considerations for investors to note is that while it acts as a perpetual bond, the company has the right to redeem the bond on certain dates. Many bonds also carry the right to differ interest payments, and this bond is no different. To understand the bond and its terms and conditions better, you can read its factsheet and prospectus.
One of the key characteristics of bonds is that they do not have very volatile share prices. This one is no different as its shares increased 0.3% to $0.988 on Friday (14 July 2017) from $0.985 a week ago.
Genting SP5.125%Perp (SGX: P9GZ)
Genting is another company that issued its retail bond paying a coupon of 5.125% when it raised $500 million on 18 April 2012. Similar to Hyflux and other retail bonds, this is a callable perpetual bond which means Genting PLC has the option to redeem the bonds if they wish, but it will continue paying coupons to investors if they do not.
On 12 May 2017, Genting issued a statement that it will call this bond as well as another of its bonds on their respective call dates of 18 October 2017 and 12 September 2017. To find out more about this bond, you can read its factsheet and prospectus here.
Trading at 1.019 as at Friday (14 July 2017), its share price has lost just $0.001 from $1.020 a week ago.
DBS Bk 4.7% (SGX: MU7)
DBS issued this retail preference shares on 22 November 2010 to raise $1.7 billion. This is also callable in 2020, where DBS will make a decision to redeem the shares.
One of the main differences of retail bonds and retail preference shares is that companies are expected to make good on coupon payments on their bonds, even if they have certain clauses for differed payments, but they are not expected to do so for shares, especially in years that the companies do not do well.
Prices of retail preference shares do not fluctuate much as well. On Friday (14 July 2017), its shares closed at $106.65, down 0.3% from the week before.
Also Read: 3 Common Characteristics Of Junk Bonds
OCC 5.1% (SGX: GG0)
Issued by OCBC, this is another retail preference share listed on SGX. It was listed on 27 August 2008 when OCBC raised $11.5 billion and carries a dividend payment of 5.1%.
Many times, the return affixed to the retail bond and retail preference share do not correspond to the actual returns investors will be receiving in the year. This could be because they are sold on the exchange, which means that investors will be subjected to certain price volatility. But the main reason for this is because of risk and global interest and local interest rates.
In times of heightened riskiness, investors may flee to safe havens such as bonds and preference shares to limit their exposure to risk while still receiving decent returns. This will cause prices to rise, which will, in turn, lower returns. When interest rates rise globally, prices may decrease and give investors higher returns.
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