So where do we go from here?
Among all this doom and gloom, a new commission was formed by the BSEC. The previous commission was in office for around 9 years, so the appointment of Prof Shibli Rubayat and his team was accepted with much more support and optimism.
The newly-appointed BSEC Chairman had expressed his intention to open the stock exchanges in June. Later, it was agreed that the stock markets would open on May 31st. This is a welcoming message. The question is, what the market will look like when it opens? Potential scenarios could be the following:
The market will not perform well due to the underperformance by the underlying assets as many public-listed companies have faced massive disruptions in their businesses due to the pandemic. This will drive down the stock prices and put pressure on the overall index.
However, we must not forget that we have the "magical" floor price. Unless the BSEC Commission is willing to lift the floor price anytime soon, most stocks will probably hit "rock bottom" and stay there. This will ultimately mean low turnover for the bourses.
Another potential issue will be the case of "no dividend" declarations. For example, Heidelberg Cement decelerated no dividends on April 23, 2020, citing losses from the previous fiscal year and the foreseeable danger due to Covid-19.
Earlier, Heidelberg Cement had declared cash dividends in the past 4 financial years: 75 percent in 2018, 150 percent in 2017, 300 percent in 2016, and 300 percent in 2015.
When companies like Heidelberg Cement declare zero dividends, they are automatically placed from "A" category (investable grade) to "Z" category (non-investable grade). Consequently, margin account holders will be forced to liquidate those stocks and that may put added pressure on the overall index.
The Heidelberg Cement case may be an extreme one, but other cash-paying dividend companies can hold off this fiscal year on disbursing dividends to preserve enough cash to weather the Covid-19 storm.
The other scenario is that the market may move sideways and could see a potential muted rally in the upcoming months for good fundamental stocks. This may be a result of the finance ministry's insistence on low levels of interest rates in the financial sector.
Investors should realize the level of impact interest rates has on any stock market. Take for example the US stock market. From an index high (market close) of 29,398 on February 20th, the DOW Jones Industrial Average Index (DJI) tumbled to a low of 19,173 on March 16th. In a month the DJI lost a staggering 10,225 points or 34.78 percent, an unprecedented drop.
Congress and the Fed got to work to protect the economy and announced massive stimulus bills amounting to over $ 2 trillion. Moreover, the Fed declared "unlimited quantitative easing" and ensured that interest rates will stay low beyond the foreseeable future.
Markets rebounded from 19,173 to 24,995 (May 26), a recovery of 5,822 points or 30.37 percent, an unprecedented recovery. The underlying US economy is still bad. The unemployment rate was at 14.5 percent in April 2020 (highest since the Great Depression, when it exceeded 25 percent) compared to 3.5 percent in February. US GDP shrank 4.8 percent in the first quarter of 2020, amid the biggest contraction since the financial crisis, ending the longest economic expansion on record.
So why did the US stock market recover in such a fast pace?
The best explanation can be found by a barefaced article written by Nobel Laureate Paul Krugman on the New York Times on April 30 titled "Crashing Economy, Rising Stocks: What's going on?"
He boldly claimed "The stock market is not the economy" and "What's bad for America is sometimes good for the market". His argument states with such low-interest rates in bonds, where else could most investors invest in.
"The interest rate on a 10-year US government bond is only 0.6 percent, down from more than 3 percent in late 2018. If you want bonds that are protected against future inflation, their yield is minus half a percent".
Could something like this happen in the Bangladesh stock market? Yes, it is entirely possible. Low-interest rates on saving instruments will deter many savers to take a chance in the stock market and there is a validation of this.
Deposit interest rates were relatively low in the period between 2016 and 2017 (6.2 percent and 5.61 percent consecutively). That period coincided with a rally in the DSEX from 4,171 to 6,318 (as previously stated in Part 1 of the article).
Due to Covid-19, the finance minister and the Bangladesh Bank have taken numerous monetary policy measures to ensure a low-interest-rate environment by ensuring liquidity and accessibility.
Such a situation may indeed bode well for the stock market. Many banks have gotten used to the practice of offering loans at 12 – 16 percent interest for numerous industries. The spread on these rates was attractive.
With the forced 9 percent lending cap, many banks may curtail lending, they may finally allocate even more funds to their stock market subsidiaries for a better return. There is also another ammo waiting for the stock market.
The Bangladesh Bank circular titled "Special Fund for Capital Market Investment" dated February 10 which allows banks (under certain conditions) to invest an additional TK 200 crore in capital market instruments against Treasury Bill/Treasury Bonds (at a REPO rate which currently stands at 5.25 percent) without the need for provisioning for 5 years. The cumulative size of this potential investment scope is TK 12,500 crore. So there is that as well.
The stock market is not quite a forward indicator against rising GDP in Bangladesh. If it was, post- 2010 crash we would have seen the market recovery much faster in tandem with our rising GDP.
A significant investor class is mostly retail-based and does not quite have the education or inclination towards long term investment in good companies.
Whenever though there is excess liquidity in the money market, it seems to partly flow into the stock market resulting in a bullish trend. Hence if Bangladesh Bank and the Ministry of Finance take prudent steps, the stock market may see a rally taking shape soon.
The new BSEC Chairman has publicly recognised many of the inefficiencies and failings in stock market policies over the past 10 years. It is refreshing and encouraging to hear him speak about developing the bond market, alongside derivatives, futures, Sukuk, options and so on.
I would like to add a few recommendations which should also be explored both by the Ministry of Finance and BSEC: corporate buyback rule for listed companies, a more streamlined bankruptcy law, and investment-friendly tax measures to promote corporate and private investments in bonds and equities.
The more bottlenecks are removed and effective policies are put in place, aided by the current low-interest rate environment, the more likely it is to see a resurgent stock market in the next couple of months.
Md Ashequr Rahman, is Managing Director of Midway Securities Ltd