iBond - Oblique Investment Against Inflation

After nearly six months of preparation, the government decided to issue 3-year term ‘iBond’ (4208), inflation-linked bonds, of up to HKD10 billion, which will be officially listed on the Stock Exchange on July 29. By iBonds, HK will mark a milestone in retail bonds with an aim of becoming the centre of Asian bond market.

According to HK Institute of Economics and Business Strategy of HKU, the second quarter and third quarter inflation will reach 5.2% and 5.9%. By the end of the year, the figure will soar to 7%. Anti-inflation became the priority concern for the citizens’ livelihood. Mr. Simon Lee, Senior Instructor (Accounting/Finance) of CUHK School of Hotel and Tourism Management, urged investors not to have too high expectations on iBonds. He pointed out a floating rate of 5%, for example, can only derive HKD1.40 per day in the case where every subscriber will be allotted one lot of HKD10,000. It may be beneficial to those passive investors who place spare cash in the bank for long-term, but it would not be an effective and comprehensive way to fight against inflation if it can at most compensate the price rise for an MTR round-trip. He went on to say unless investors could be allotted ten lots or more to gain a large sum of interest, iBonds will not be a good anti-inflation instrument. Moreover, as an aggressive investor, Lee admits he would not be willing to invest HKD10,000 fixed principal for an under-reward of four to five hundred dollars annually at a rather high opportunity cost.

An ideal investment portfolio could be optimized by comprising of bonds with different interest rates or different maturities. As iBonds basically provide floating rates and negligible fixed rates of 1%, Lee proposed iBonds to provide different terms as a choice for different investors in the future. In fact, there is a wide variety of fixedincome investment products in HK, such as Exchange Fund Notes. However, such products are not welcomed by local retail investors as they usually require investment principal of hundreds of thousands HK dollars. The U.S, U.K., Australian and Brazilian treasuries, in 3-year term like iBonds, provide yields of 0.75%, 2.25%, 6.25% and 10% respectively. As to local 3-year corporate bonds, such as those of China Merchants Group and MTR, also provide interest rates of between 1.2% and 2.1%.

However, most female investors are attracted to fixed interest with capital guarantee and go after iBonds in a swarm. As a financial expert, Denise Cheung, Chief Executive of Money Concepts Holdings (Asia Pacific), encouraged women to invest in bonds and iBonds would be a good choice as retail bond investments. She believes that female investors need to choose carefully the proportion of iBonds or other kinds of bonds in their investment portfolio basing on their ages. She explained that younger women can choose a more aggressive portfolio with 20% of bonds; middle-aged women should consider having 40 percent in bonds; the retired, with capital guarantee in mind, should have 70%. Cheung said the two-year term’s iBonds would be better than the three-year term’s as we are in the second phase of a bull market which will be at a turning point three year from now. 2012 to 2013 will likely enter into a rate hike cycle which may impose downside impact on bond prices. That could be a potential investment risk for iBonds.

After all, the iBond’s return is attractive to conservative investors but its investment value is difficult to compare to stocks and other investment instruments. As to the product itself, by an offer price of HKD10,000 per lot, the holder can receive inflation-linked interest of not less than 1% once every six months. For the first dividend payable date on January 30 next year, the interest fixing date will be January 11 and reference will be made to the average annual inflation rate over the past six months for the floating rate. Daniel So, analyst of Sun Hung Kai Investment Services Ltd, said he would prefer to earn a 3.5% annual interest rate with 2% RMB appreciation by opening an RMB account in China rather than iBonds. Alternatively, one may choose to invest in the first RMB-denominated REIT Hui Xian REIT (87001) to gain stable annual interest of more than 4%. For these reasons, So believes that iBonds would not be an ideal instrument for aggressive investors.