When junk stocks rule

Observers are now worried to see abnormal share price hikes of most poorly performing low-cap listed companies in the Bangladesh stock market over the recent months.

Of the 30 stocks gained most in the Dhaka Stock Exchange (DSE) over the last one month, 22 companies are the struggling ones, which have been suffering production halt or hiccups and financial devastation over years.

Many of the shares with devastated fundamentals gained by even 5 times in the last one year.

In the bourses, the popularly called junk stocks are significantly beating their industry peers who are in regular business operation, posting profits and giving dividends to their shareholders.

This is not an expected way for the stock market to go up, said stock market expert Abu Ahmed, a professor emeritus of economics at the University of Dhaka.

Stock market has been in a steady rise since June 2020 from its years' trough as too many stocks need virtually no reason to jump up.

Faruq Ahmad Siddiqi, a former chairman of the securities regulator, the then Securities and Exchange Commission, said ideally, the stock market tends to advance and correct over time, which results in a healthy rally. Since mid-2020, the market seems not to have been doing that, which generally ends up with sharp corrections.

The second aspect of his concern is about the unstoppable junk stocks.

"There might be some market manipulators behind the abnormal price movements," he said.

"Instead, give me a body that fits my coat," a senior stockbroker was describing how the stock market works when mass investors rush for quick gains and the market manipulators cash in on the trends.

He was referring to the common question, "What should come first – the business performance of a listed company or its stock price?"

The market manipulators just need a listed scrip, regardless of the company fundamentals, and some money to accumulate enough shares from the market that would enable them to control the price, explained the veteran stockbroker who requested anonymity.

"Rest of the investment discourses are useless to the speculators who only gamble in the market for some quick bucks," he kept saying, "Though evidence suggests that mass investors barely end up with profits from blind speculation."

Analysts observed, junk stocks are dominating the market nowadays following the BSEC's series of moves to bring underperforming companies back on the track, through consultation, restructuring or delisting in cases of no hope for improvement.

The moves are still merely efforts and the price jumps are real.

Abnormal stock price which is not supported by company fundamentals does not sustain and investors must be cautious, said Prof Abu Ahmed.

The dip and the sharp rise

After the notorious 2010 crash, the stock market of Bangladesh had been in a decade-long depression until the first wave of Covid-19 eased in the middle of last year.

The market went in such a sorry state in early 2020 that the finance minister had to request bank owners to opt in for the stock market rescue plan under which the central bank allowed commercial banks to build concessional stock investment funds.

But the response then was poor and the market was in a free fall.

Smelling the pandemic spread amid no hope for a robust fund flow, DSEX, the broad-based benchmark of the DSE, dipped below the 3,600 mark in March, 2020 and the Bangladesh Securities and Exchange Commission had to put an unconventional floor on individual scrips.

Meanwhile, when the bourses were shut during the 66-day long general holidays, the BSEC got its new chairman Professor Shibli Rubayat-Ul-Islam and other commissioners who helped the market gain investors' confidence through various measures that include drives to make listed companies more accountable to their shareholders and advocating for the capital market interests.

An unconventional role of investment promotion home and abroad by the regulator itself have drawn mixed bag reactions as market groups cheer the potential fund inflow, while experts like Faruq Ahmad Siddiqi say the regulator should maintain a fair distance with the market factors and groups and it should rather focus on ensuring compliance across the boards.

However, the monetary easing and a gigantic government stimulus to help the economic recovery during Covid-19 resulted in record low interest rates in the country, while demand for private sector credit remained too low, savers, businesses and financial institutions turned to the stock market for better returns.

And, the rush is pushing the stock prices and indices higher with bare pauses.

DSEX, the ancestor of the previous general index DGEN of DSE that crashed from the 9,000 mark in 2010, shot to over the 7,000 mark on Sunday, while well performing businesses are mostly underperformed in the stock market by junks.

The Bangladesh Bank suspecting stimulus loans to have been diverted to speculative stock investments recently have begun increasing its restrictions to tame the money flow into stocks and that has been countered by the BSEC as it raised the DSEX slab to 8,000 from 7,000 for allowing up to 50% margin loans, which was set to come down to 25% of investors equity as soon as the DSEX goes above 7,000 mark.

Such a clear regulatory move to see the market going higher is unconventional for sure.

On the other hand, institutional investors like commercial banks are also more for stock investment nowadays and the Bangladesh Bank this week has penalised NRB Commercial Bank for overinvestment in stocks while it warned a dozen banks as they were not complying with their stock investment guidelines.

Long after the 2010 crash to see institutional overenthusiasm in stock investment. Is the market heading for a repetition of the pump and dump, bubble and burst?

Faruq Ahmad Siddiqi, who led the securities regulator more than a decade ago, said the market overall is not at a risky height at all, which might trigger a 2010-like situation right now.

"But junk stocks are increasing risks," said Professor Abu Ahmed.

"The regulator and exchanges should seriously monitor junk stocks so that no one can manipulate their price," he added, and modern IT-based surveillance systems should have been able to check these.

Is the securities regulator monitoring?

This reporter talked to Rezaul Karim, an executive director and the spokesperson of the BSEC, asking if the regulator is monitoring abnormal price hikes seriously.

He said price is an outcome of demand and supply. The BSEC's role is to make sure that there is no wrongdoing by any party – issuers and investors.

"We enquire abnormal price movements, check authenticity of disclosures by relevant companies and investigate if any manipulative moves in the secondary market," he said.

He said the regulator and the stock exchanges are enquiring about several companies' abnormal stock price hikes and a recently formed committee is monitoring every single development regarding small-cap companies' share price hikes.

"When abnormal prices are an outcome of erratic behavior of innocent investors, the regulator has nothing to do but request for caution. On the other hand, if anyone found to have violated securities law, is subject to punishment and we do it," Reza said.

"This time, we are working deeper and silently so that our act does not panic the market. But wrongdoings by legal definition will not remain unaddressed," he added.

The BSEC is using multiple secretive sources to learn about insider trading, circular trading and stock price manipulation, according to Rezaul Karim.

"Until any guilt is proven, all we can do is request the investors to take a second look before they put their money into any share," he said.