Story behind stock market's lost steam

Much to the surprise of the majority of people, the stock market sharply rallied during the first two waves of the Covid-19 pandemic despite too many uncertainties and challenges facing the economy.

Later last year, another puzzling development began to take place – the market lost its momentum and began to spiral down as soon as the pandemic worries eased and the economy proved its resilience.

Since October last, the total market value of all the companies listed on the Dhaka Stock Exchange (DSE) have declined by Tk81,000 crore or nearly 14% in nine months, while the DSEX – the broad-based index of the premier bourse – dropped by 17.3%.

Panic gripped the market in a fashion that most of the DSE shares had no buyer at the allowable daily trading range twice last week, while the reluctance of buyers pushed the DSE turnover to a 15-month low on Tuesday.

Amid the downward spiral, buying stocks has become almost synonymous with capital erosion nowadays.

Analysts not surprised much

Analysts, however, are not much surprised at the situation.

Their bets are based on forecasts of future corporate earnings and net money flow into stocks.

In the fiscal 2020-21, the market was flooded with low-cost stimulus money and stock prices on the bourses of Dhaka and Chattogram were merely recovering from their levels of a multi-year low.

When the DSEX had a sharp 87% rally over 15 months till October 2021, prudent investors found profit booking better, especially when they saw global supply chain disruptions and soaring commodity prices creating risks to hurt corporate earnings, alongside the upcoming upward pressure on interest rates.

Interest rates are a significant factor for the stock market. When they get lower it helps boost the economy and corporate earnings, and investors prefer stocks for a higher return. And vice versa – when rates go higher, mostly for the sake of curbing inflation, economy and corporate earnings tend to be under stress, and investors prefer risk-free investment options such as fixed income tools, gold than stocks, explains Abdul Muqtadir, a chartered financial analyst (CFA) and the managing director of PLFS Investments Ltd.

Since late 2021, factors such as global commodity prices, costs of businesses, and interest rates have kept going against the stock market amid some short-lived optimism.

Analysts have said the Russia-Ukraine war that began at the end of February this year has appeared as the biggest blow to the global economy, which has pushed inflation to decades-high levels across Europe and America because of the energy and commodity market turbulence.

On top of the inflation pressure, currency depreciation against the US dollar has put developing economies, including Bangladesh's, under enormous pressure.

Bangladesh in June reported its official inflation reaching an 8-year high. And with the continuation of the situation, the Bangladesh Bank is being anticipated to lift its lending rate cap.

The worst fear that hurt the stock market seems to have been about the foreign exchange reserves that came down to below $40 billion in July, from over $48 billion 11 months earlier.

As soon as the government announced energy austerity measures to save foreign currency last week, the stock market went into free fall as investors associated the situation with that in Sri Lanka that cannot afford any foreign currency bills for imported energy, and essential commodities due to its depleted reserves and people faced with the economic nightmare.

Stocks created new lows last week. And with the return of the buyers who bet on a better proposition than the feared future of the economy, the free fall has stopped, at least for now.

The US dollar in the banking channel hit Tk102-103 last week.

The bright spots

Abdul Muqtadir, CFA, said not every listed company would be a victim of the ongoing global macroeconomic turbulence and that some who made the right moves before the crisis would even post higher earnings.

Export-oriented firms, if they continue their businesses, will post higher revenue and profits in the coming days and should thank the currency depreciation for it.

"I noticed a few companies that built huge raw material inventories months ago and the local value of the inventories have simply shot up 20% higher only because of the currency depreciation, while the soaring global prices further added to the value," he said.

The country earned record foreign currency from exports in the last fiscal year, mostly from apparel exports as usual. But investors now fear that the recession threat on Europe and the US might hurt exports.

Bangladesh is an exporter of the most affordable clothing and the demand for low-cost products is unlikely to be hurt on the bad days, he said.

"Giffen goods are almost recession-proof," said the investment expert.

Additionally, in the local market, unlike the consumer discretionary items which a consumer might buy later instead, there are some sectors that barely face the shocks of economic hardship as demand for their products and services is always strong due to the nature of the products being felt essential right now.

Asif Khan, CFA, managing partner of EDGE Research and Consulting, said pharmaceuticals, tobacco, and telecommunication services are good examples of these.

Investors can look into these defensive sectors as they are typically very resilient to economic cycles, he added.

But the panicked market seems not to lend an ear.

What's louder in Motijheel?

Investors' confidence is seriously hurt and that is the main reason behind the market's weak behaviour nowadays, said DSE Brokers Association of Bangladesh (DBA) former President Mostaque Ahmed Sadeque.

People got scared learning about the recently unfolded DSE findings that too many stocks have had manipulated rallies in the last two years, he said.  

"I know many institutions and wealthy individuals who have huge funds but are not interested in buying stock nowadays," said Mostaque Ahmed, managing director of brokerage firm Investment Promotion Services Ltd.  

The DSE has sent around 20 investigation reports to the Bangladesh Securities and Exchange Commission (BSEC), including its surveillance findings that an errant government official, Abul Khayer Hero, who amassed a fortune from the stock market in the last two years, was behind the manipulated price rallies.

A brokerage chief executive officer, seeking anonymity, said DSE investigations and media reports clearly revealed that Abul Khayer Hero, in collaboration with his associates, manipulated several dozen stocks' prices and the regulator overlooked those.

It has been a big blow to fair investors' sentiments, he observed.

"My wealthy clients who want to remain compliant with securities law are disheartened when they see too many challenges in fair investing and that it is too easy to make money through market manipulation," said the stockbroker, who has three decades of experience in the brokerage industry.

Another brokerage CEO said the stock market bounced back amid the pandemic also because of the new leadership in the BSEC as the investment industry and investors firmly placed faith in the new BSEC Chairman Professor Shibli Rubayat-Ul-Islam's charismatic personality.

"But he broke the confidence through using manipulators to take the market higher and apparently offering them indemnity," he said, seeking anonymity for the sake of averting any risk of confrontation with the regulator.

The international roadshows the regulator organised last year are not bringing fruits as foreign portfolio investors have long been selling off Bangladesh stocks, while a foreign portfolio investment inflow could have helped strengthen the country's currency reserves right now.

Forcing the market participants not to sell stocks and only keep buying for the sake of the index, while ignoring a few wrongdoers' acts, overlooking the suspicious junk and small-cap stock rallies also has made the regulatory leadership controversial, the brokerage professional said.

"Manipulated price hikes are barely sustainable," he concluded.