Thailand’s regulators need to encourage a more diverse bond market, including adding high yield and unrated bond instruments, to help local investors raise meagre returns, say experts.
Speaking at the final panel of AsianInvestor’s Thailand Global Investment Forum in Bangkok on September 7, a group of market officials and fund managers analysed how the country’s investing environment should change, as well as the role technology should play. A key focus was fixed income investment, where most of the country’s investors tend to place their money.
“High net worth individuals still prefer to put their money into fixed income, as they see stock exchanges as a risky place. We need to address this and make them more trustable,” said Pisit Leeahtam, president of the Association of Provident Funds Thailand (APFT). “It’s clearly much better than fixed income [in terms of the potential for higher returns] but the sense in Thai investors for so long has been that it’s risky.”
The country’s provident funds, which had Bt973 billion ($29.4 billion) in combined assets under management at the end of 2016, according to the APFT. However, Jomkwan Kongsakul, director of investment management policy department at Thailand’s Securities and Exchange Commission (SEC), said these funds invest 85% of their assets into bank deposits and local bonds, which are required to be highly rated, and only 15% risk assets.
Pisit argued this meant the country should be seeking to liberalise the bond market, and encourage lower grade local debt.
“At the moment I’m of the view the SEC is overprotective of investors and you do not allow high yield paper to be floated,” he told Jomkwan. “In the US they have brought high rated and high yield debt, but in Thailand only the first is allowed to be floated.”
Responding to Pisit’s comments, Jomkwan admitted that high yield bonds could not be listed locally, but noted that “we allow funds to invest 100% into high yield bonds, but they need to be diversified like [with] international regulations.”
Thai rules stipulate a maximum 5% exposure in any fund’s assets under management to an individual high yield borrower, she added. That compares to some other regimes where up to 20% to 25% can be invested into the debt of one borrower.
“If you invest into a fixed income bond fund like that one fourth of your money could disappear,” Jomkwan noted, adding “If you look into our bond market it may seem conservative but actually it’s not, and Thailand has proven that even investment grade [borrowers] can default”.
The country was rated A2 by Moody's at the beginning of 1997, the year of the Asia financial crisis, but this fell to Ba1 by the end of that year, after the country devalued its currency and struggled to pay large foreign currency debts.
While Pisit agreed that defaults can take place between high grade as well as junk rated borrowers. But he said this was the exact point—that many arrangers are not permitted by the SEC to float high yield bonds at all.
“You should allow investors to be able to take the risk and have the ability to access the market; it should not be closed altogether,” he argued.
Longer debt longing
Vasin Vanichvoranun, executive chairman of Kasikorn Asset Management, argued that encouraging investors to consider higher yielding and long-dated fixed income investment options was important, given that fixed term debt products were filled with short-term debt instruments that typically returned around 1.6% a year.
“It’s not that high [a return] and normally has [investments with] maturities of three months and six months. Every time when these bonds mature we need to find something to replace them, which is very costly,” he said.
Vasin said he would like to see more efforts to promote unrated bond issues, which tend to be very small in nature in Thailand, when they take place.
“We spent a long time seeing whether it was justified in investing into the issues, but they were small so we decided not to,” he said. “We see a lot of unrated issues in Hong Kong and Singapore but there are more investors in that space.”
Educating the masses
Yingyong Nilasena, chief investment officer of the Government Pension Fund, added that a key component to building the market will come down to investor education.
“Many small companies offer more interest [to investors] now and so education will be important,” he said. “For some years there has had to be protections as the understanding of investors was quite low.”
“If we educate the investors and allow the fund industry to issue some of these products that take the opportunity [to invest into riskier assets] that might benefit the core industry, and at least they will learn something, and th opportunity will increase, as will good cooperation,” he added.
Jomkwan agreed, noting that it would be key to target middle class, white collared investors. “They don’t quite understand the risk of investments so they search for yield and look for something that is high and don’t read the prospectus or fact sheet,” she noted.
“We have to strengthen the point of sale, and improve the explanations to help them make informed decisions.”