Thursday, June 17, 2010

Attractive 5% net yield from Sukuk 1Malaysia

CONFIDENCE in the stock market rally, which began in March 2009, has been doused with a return of uncertainties in recent weeks. Global stocks have witnessed a sharp spike in volatility.

It is telling that the divide between the bulls and bears has widened even as market analysts grappled over the impact of the sovereign debt crisis in Europe on the rest of the world. Persistent high unemployment in the US, China’s crackdown on its property sector and select industries suffering from over-capacity as well as rising commodity prices too continue to pose questions over the health of the global economy.

Anecdotal evidence suggests that investors are turning more risk averse, paring back on high risks bets in favour of safer investment alternatives.

In this respect, Bank Negara Malaysia’s upcoming issuance of some RM3 billion of Sukuk 1Malaysia 2010 (S1M), on behalf of the government, will give investors one more alternative.

Better than FD rates with zero risk
The savings bond carries a net yield of 5% per annum with a three-year maturity period. Profit will be paid quarterly. Subscription for the bonds will close on Wednesday.

Whilst a 5% return may not appear exciting at first glance, the bond is a very good choice when it comes to picking a safe investment for one’s portfolio.

A typical investment portfolio will consist of a mix of low and higher risks instruments. The exact mix is usually dependent on factors such as the investor’s age and propensity towards risks as well as market trading conditions.

At the lowest risk end of the portfolio would be bank deposits and government bonds, followed by progressively more risky assets such as corporate bonds, REITs (real estate investment trusts), unit trusts, equities and derivatives.

Both government bonds and bank deposits are considered to be zero risk investments. As such, returns on the S1M compare very favourably to prevailing bank deposit rates.

Major local banks currently offer fixed deposit rates of about 2.5%-2.6% and 2.8% for less than six-month and 12-month tenures, respectively. For an equivalent 36-month fixed deposit placement, investors will earn interest ranging from 2.9% to 3.15%.

Early redemption option at no penalty
The S1M has an additional feature — it is resaleable. That means investors can redeem the bonds at anytime within the three-year tenure. This is a first for government savings bonds.

The option gives investors greater flexibility in managing their cash flow with no penalty charges. Profit is calculated based on the actual number of invested days. Bonds sold back to the agent banks will be made available for re-sale to the public.

In fact, returns on the S1M do not compare too poorly even when benchmarked against REITs and defensive, high-yielding stocks traded on the local bourse.

Net yield for the REITs listed on the local bourse is estimated to average roughly 8.5% while the usual suspects for high-dividend stocks like YTL Power International Bhd, British American Tobacco (M) Bhd, JT International Bhd, DiGi.Com Bhd, Maxis Bhd and Amway (M) Holdings Bhd return net yields estimated at between 4.3% and 6.8%. Equities, of course, have upside potential in terms of capital gains but also downside risks if share prices drop. — InsiderAsia

This article appeared in The Edge Financial Daily, June 7, 2010.

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