SINGAPORE'S warrants market took a beating last year, as risk-averse investors steered well clear of these volatile instruments amid the financial crisis.

Turnover for warrants, which had become immensely popular in recent years, fell steeply to 2005 levels.

These instruments are linked to movements of other assets, mainly stocks or stock market indexes. One attraction is that they are cheaper than the mother stocks, but the percentage swings can be wild.

Despite last year's drop, issuers of key warrants say the worst is over and that buying interest among investors is set to return this year.

Data provided by Societe Generale - a major warrants issuer in Singapore - showed that warrants turnover almost halved from $21.1 billion in 2008 to $10.9 billion last year. The ratio of warrants to overall market turnover also nearly halved - from 5.7 per cent in 2008 to 3 per cent last year - the lowest level since 2004.

'It was an alarming decline. We were back to pre-2005 levels,' said Mr Edmond Lee, Societe Generale's director for equity derivatives for Asia ex-Japan. 'But the worst is over. Whether it can rebound will depend on market participants, and whether retail investors regain their confidence.'

Average daily warrants turnover slumped by nearly half to $43.4 million last year from $83.9 million in 2008.

Mr Barnaby Matthews, head of derivatives at Macquarie Capital Securities, said the major cause of the decline was the financial crisis, which rocked investor confidence. He said: 'Investors lost money in property and stocks, and thus reduced their leveraged exposure to the markets.'

The number of new warrants listings sank by 40.4 per cent to 712 last year from 1,194 in 2008, as issuers cut listings owing to weak investor demand.

The sole bright spot for warrants last year was that trading of warrants linked to the Straits Times Index rose from $2.21 billion in 2008 to $2.71 billion last year - about 25 per cent of total turnover. Daily average turnover for the local index contracts rose by 21.4 per cent to $10.8 million.

Once again, Hang Seng Index warrants were the most highly traded, commanding a turnover of $5.56 billion - 51 per cent of total warrants turnover in Singapore.

Among the single stock warrants, DBS Group Holdings, CapitaLand and United Overseas Bank took the top three spots on the popularity charts.

Mr Lee expects investor interest in warrants to return this year as global recovery kicks in, and tips that the warrants turnover ratio in Singapore will rise to about 4 per cent this year.

One key driver for the warrants market's rebound could be the big initial public offerings in Hong Kong this year, which will mean warrants issued in Singapore on these foreign stocks, he noted.

Mr Matthews added: 'Warrant volume will grow as investor confidence returns. We're already seeing signs of improvement - a couple of issuers have re-entered the market, and we've seen a lot more interest in single stock warrants recently. Thus, it shouldn't be too difficult to move the ratio back to 5 per cent.'

alfoo@sph.com.sg