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Chan Cheh Shin, Investment Advisor of Asian Islamic Investment Management Sdn. Bhd. (AIIMAN) shares his views on the effect of MENA Turmoil to Bonds

1. Will bonds be back in favour with current market jitters? Why?

First we have to look at the factors that caused the pullback in markets recently and to assess the impact of the motivating factors. Our sense is that it is mainly due to inflationary concerns in Emerging Markets, compounded by reactions to the oil price hike as a result of the geo-political tension in the Middle East and North Africa region (MENA). That triggered the flight from equities and corporate bonds to traditionally held safe haven such as properties, precious commodities, and sovereign bonds. However, oil prices will taper off once the dust clears in MENA and we do not expect it to stay sky high for too long. Hopefully after the prices cool, stability will return to the market.

As a result of the current uncertainties in the market investors are now looking into sovereign bonds of Developed Markets (DM) namely German bunds, UK gilts and the US Treasury Bills, and of course Russian sovereign bonds as well, given the country’s position as one of the top five oil producers in the world. The oil price hike will be a boon to the Russian government bonds. Should the situation gets any worse, we will see more investors favouring DM government bonds compared to the corporate bonds as corporates will be affected during inflationary times.

2. Any growth figures for this asset class currently and projections for this year?

The data by JP Morgan showed an outflow of both EM equity and EM bond funds totaling US$ 19 billion for the month of February 2011 (as at 25 February 2011), with the former bearing the brunt of the outflows.

From a shorter term perspective, more funds are expected to raise their exposure in the fixed income asset class especially in DM sovereign bonds and the high quality US corporate credits, as earnings have been looking strong in the recent weeks.

From a macro and longer-term perspective, we should see more global real money investors diversifying away from core assets such as bonds and equities to properties and alternatives such as commodities.

3. When do you expect investment in bonds or other less risky assets start abating? Or is the demand for bonds or other less risky assets only a temporary play in view of the current unrest etc? What other factors are driving its growth? Explain.

Please refer to Q1 > 1st paragraph & Q2 > 2nd and 3rd paragraph.

4. What other types of less risky assets will see its growth and demand picking up in view of the current unrest? How and why?

Please refer to Q1 > 1st paragraph.