Why do funds divert from stocks to fixed-income options

Stocks have been facing a liquidity shortage due to funds flowing out of the country's capital market into more secure and lucrative fixed-income instruments – such as Treasury bonds and fixed deposits.

Market insiders have noted that while Treasury bonds and bank deposits are offering attractive rates, returns from stock investments have been bearish. This trend has driven investors towards fixed-income options.

"Treasury bonds and bank deposits offer approximately 10% interest on investment, whereas investors have experienced a negative return of around 7% from the stock market over the past year," said Amarstock – a web-based data provider about the capital market.

Moreover, investor participation has drastically dropped, leading to the daily turnover of the Dhaka Stock Exchange being sharply below Tk400 crore.

Saiful Islam, president of the DSE Brokers Association of Bangladesh (DBA), told The Business Standard, "We have an interest rate of around 10% on Treasury bonds here. In line with this, banks and non-bank financial institutions are also increasing interest rates to attract deposits. In such a situation, money moves out of the stock market into deposits, and this is a trend observed globally. We are no exception."

"Investors are now turning to deposits to avoid risk. Moreover, there is no supply of good shares to attract investors, nor is there any effort being made to address this."

He also mentioned that for the last year, most companies paid low dividends. Besides, economic uncertainty increases the risk for investors.

According to data from the Dhaka Stock Exchange (DSE), out of the 62 trading days between 1 January and 4 April, the stock market experienced declines on 33 days.

Recent market trends suggest that investors are increasingly wary of continuous price falls, with some opting to exit the market altogether. This apprehension has led to a segment of investors selling shares at losses, driven by concerns that prices may decline further.

During the 19 January–4 April period, the benchmark index DSEX of the DSE nosedived by 9%, or 540 points, to 5,796, resulting in Tk1 lakh crore being wiped out of the country's premier bourse in value. Currently, the market capitalisation stands at Tk6.77 lakh crore.

According to the Central Depository Bangladesh Limited (CDBL), which automatically maintains shares and BO accounts in the stock market, the number of BO accounts with zero share balance on 18 January was 2.98 lakh. The figure rose to 3.53 lakh at the end of the trading session on 4 April.

When the total number of BO accounts in CDBL is 17.87 lakh, 20% of the accounts are inactive.

Due to massive selloffs, the number of BO accounts with a share balance fell by 43,344 to 13.58 lakh.

Investor confidence remains subdued

Despite several policy changes, investor confidence in the country's capital market remains subdued, as reported by the World Bank in its "Bangladesh Development Update" released on 2 April.

In its report, the World Bank mentioned that the Bangladesh Securities and Exchange Commission (BSEC) withdrew floor prices on equities on 18 January, a move deemed to have alleviated a major market distortion.

Through the floor price, which was imposed in July 2022 to prevent the fall of the stock market, the regulatory body artificially kept the market within a limit for more than one and a half years, said the global lender. But after the floor price restrictions were lifted, the market could no longer be tied, it said.

Rezaul Karim, spokesperson and executive director at the BSEC, told TBS that the commission always works with the priority of protecting the interests of investors and increasing their confidence. But investor confidence does not always depend on BSEC and its policies.

He also said the confidence of investors depends a lot on the country's macroeconomic condition. "The commission feels that investors' confidence in the capital market is somewhat low given the current macroeconomic facts. But this distrust will not exist," he added.

Brokers' seven points for a better market

The DBA held a meeting among the top brokers on 19 March and stated in a press release that they believe the fall is a natural consequence of the withdrawal of floor price restrictions.

They expressed their anticipation that the market should soon take the right course, attracting investors to lucrative stocks at cheaper prices.

They urged policymakers and regulators not to consider any radical market interference, such as reinstating floor price restrictions.

Their major demands, according to the statement quoting DBA President Md Saiful Islam, included listing more of the well-performing companies to increase the supply of quality stocks, strengthening the mutual fund sector, ensuring reforms in the stock categorisation system and margin loan regulations, and ensuring compliance in listing and operating listed firms.