HITTING THE HIGHS - JSE MAGAZINE

HITTING THE HIGHS

The bond market in SA has grown substantially over the past decade and looks set to become even bigger

HITTING THE HIGHS

A great 2012 was followed by more subdued trading last year. However, SA bonds are being seen as an increasingly good investment by local as well as international investors.

Bernard Claassens, Manager: Fixed Income at the JSE, says volumes have grown over 15 years from less than R1 trillion to hit R20 trillion.

Claassens says his visits abroad have shown there’s an excellent appetite for SA bonds.

‘Foreigners have become bigger role players in our market, holding a third of all government bonds. This is a sharp increase from less than 10% five years or so ago,’ he says.

Bonds are generally seen as a good reduced risk alternative. Investors in bonds lend a certain amount of money to a borrower for a specified period of time. The investor will receive regular fixed interest payments as long as the bond exists.

The borrower – a company or a government – is obliged to repay the full amount of the loan on a pre-determined maturity date. If for some reason the issuer of the bond is liquidated, the bondholder is given first preference and is paid out first.

While equities turn over around R10 billion a day, the bond market does R30 billion

Claassens says changes in the market and new trading systems are afoot. Plans are in the pipeline to make it easier for South Africans to enter the bond market.

‘A lot of people think you need a million rand to play in the bond market. But that isn’t so. In European markets, everyone holds bonds. They’re geared towards them. We want to make them more accessible to more South Africans.’

Claassens says bond markets are massively institutional globally, while corporate bond markets tend to be more retail focused.

In SA, companies like BMW, Daimler Chrysler and SANRAL have been issuing bonds and paying decent returns, says Claassens. The amount traded in the SA bond market is substantial. While equities turn over around R10 billion a day, the bond market does R30 billion.

The world bond market is dominated by the US, which accounts for almost 70% of global totals. World bond markets were valued at a total of $78 trillion at the end of December 2012 by the Bank of International Settlements.

One of the newer types is climate bonds, which are issued to raise finance for ‘climate change solutions’.

‘These might be greenhouse gas emission reduction projects ranging from clean energy to energy efficiency, or climate change adaptation projects ranging from building Nile Delta flood defences to helping the Great Barrier Reef adapt to warming waters,’ according to the Climate Bonds Initiative, a special venture of the Carbon Disclosure Project and the Network for Sustainable Financial Markets. Their aim is to have $1 trillion invested each year into low-carbon industries.

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Like other bonds, climate bonds – sometimes known as green bonds – can be issued by governments, banks or corporations.

Most climate bonds are use-of-proceeds bonds, with investors being ensured that all funds raised will only go to specified climate-related programmes or assets. The London-based Climate Bond Standards Board provides a certification programme for climate bonds.

The board has already created standards for wind energy bonds, with solar and energy efficiency investments the next to be certified.

In October, the African Development Bank (AfDB) issued a three-year, $500 million green bond, which will finance ‘low carbon and climate resilient projects’. According to the AfDB, these include renewable energy generation, energy efficiency, vehicle energy efficiency fleet retrofit or urban transport modal change, biosphere conversation projects, solid waste management, fugitive emissions and carbon capture, urban development and water supply and access.

‘Socially responsible investors’ bought 84% of the bonds and among the 36 investors were the Third Swedish National Pension Fund and BlackRock, the world’s largest asset manager.

By John Rossouw
Image: Gareth van Nelson/HSMimages