Business | Property
Bonds may be the safer option
The bond market in the Middle East is certainly beginning to attract more interest from investors - partly because of the reasons you've outlined - so you're wise to begin investigating this area.
- By Michael Walton, Special to Gulf News
- Published: 00:04 June 28, 2008
Q: I am interested in learning more about the bond market in the UAE. My portfolio has suffered after the bad performance of the stock market. I am wondering if the bond market is more secure and can assure that some of my investment is protected. What are the regulations regarding bonds in the UAE?
A: The bond market in the Middle East is certainly beginning to attract more interest from investors - partly because of the reasons you've outlined - so you're wise to begin investigating this area.
However, from the outset it is worth bearing in mind that the bond market in the UAE is relatively immature and - as in many countries - is currently decentralised and without a common exchange.
Certainly the bond market here shows signs of rapid development - it has been reported that the Ministry of Finance is currently studying the potential for issuing Treasury Bonds with World Bank experts - but it's worth seeking professional advice to understand when and where to best invest in bonds.
Taken simply, the bond market is a fixed income market, where you can buy and sell debt securities, usually in the form of bonds. A bond is effectively an agreement with an authorised issuer, whereby you lend them money, which they agree to repay, with interest, at a later date.
There is a huge number of types of bonds available in the world market. These include fixed rate bonds, where the interest remains constant throughout the life of the bond; floating rate, where the interest is linked to a stock market index; inflation-linked bonds, and perpetual bonds, which have no maturity date.
One market with the most potential in the UAE is the Islamic bond market, which are debt securities that comply with Sharia or Islamic law.
Rather than pay back interest, Islamic bonds are often structured as profit-sharing ventures, often using ijara, the sale-and-leaseback of an asset.
A good example of a successful Islamic bond is the UAE's National Bonds, which are based on a Mudaraba (fund management) agreement. Since its launch in 2006, this has proved a very popular point of entry for many residents into the bond market.
Given the relative young nature of the market, there are limited opportunities for an individual to directly invest in bonds in the Middle East outside programmes like the National Bonds. Typically, the institutions that are investing in the more significant bonds are pension funds, insurance companies and banks. This is in stark contrast to an established market like the US, where approximately ten per cent of all bonds are held by individuals.
Minimum investment
It may be the case that you have already invested in bonds through your relationship with your bank or pension provider. A number of banks are now offering global bond funds, as are a number of specialist financial advisers. Typically, these funds ask for a significant minimum investment.
So, given the challenges and complexities of the bond market, why is there this upsurge of recent interest? The conventional wisdom is that bond markets rise when stock markets fall, making them a safer investment than stocks.
It is certainly the case that bonds show less day-to-day volatility than stocks, and a bond's payment can be higher than a shareholder's dividend. It is also true that bond holders have a greater degree of legal protection than shareholders in cases of bankruptcy.
However, stocks have historically out-performed bonds in most international markets over the long-term. Ensure that your portfolio is well-balanced, so that you are getting both security and a healthy return on your investments.
The writer is director of general insurance at Nexus, a leading regional financial adviser. The opinions expressed above are the writer's and don't necessarily represent the views of Gulf News. Please send your questions to advice@gulfnews.com.
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