The trading floors of stock brokers have regained their usual look – full of crowds, noise, cheer, and the excitement of retail investors – amidst and despite the ongoing novel coronavirus pandemic.
Over the last six-and-a-half decades, the journey of the Bangladesh capital market has not been smooth. The market remains in a nascent stage, with little or almost no diversification scope, dominated by retail investors who lack the necessary financial knowledge.
The market has failed to keep up the pace with the growth engine of the economy. There exists a clear divergence between Bangladesh's economic growth and capital market wealth accumulation. Even though the economy of the country grew by 2.5 times during the decade, the market remained almost stagnant. The gap between the economy and the market has widened.
The country's market cap to GDP ratio remains on one of the lowest edges compared to other countries. Two major stock market crashes took place in 1996 and 2011, respectively, while a prolonged bearish streak has been observed throughout the last decade. With these setbacks strongly impacting the market, the capital market of Bangladesh has gone through several reforms and the enactment of new laws and regulations.
The government initiated a massive reform programme that included: the regulator, stock exchanges, intermediary industries, policies, and regulations related to market activities. Both the stock exchanges of the country have been demutualised, separating their operations and ownership.
The premier bourse Dhaka Stock Exchange (DSE) has already secured a strategic partnership with China's Shenzhen Stock Exchange-led consortium. But neither of them have worked out to turn the market into a stable vibrant one until now. Investors have suffered losses, their invested capital has eroded and such experiences have ultimately hurt their confidence in the market.
If we take a closer look at the recent past, there have been some clear reasons for past market falls and revivals. The DSE prime index dropped by 50 percent from 2010 to 2012. In 2010, a bubble in the market was created by huge overvaluation of stocks. When the bubble started to burst, margin calls and forced selling exaggerated the sell pressure in the market.
Bangladesh also entered into some financial reform programmes prescribed by one of its development partners during that time that contributed to the market fall. The market started to revive in 2013 when foreign investors started to invest in the Bangladesh market – finding a lucrative valuation of stocks. In 2017, a low interest rate regime and excess liquidity in the banking sector contributed to the 40 percent increase in the broad market index.
However, later a liquidity crisis – mostly caused by the mounting Non Performing Loans (NPLs) in the financial sector and an interest rate hike – took away funds from the capital market to the money market. A higher NSC rate has also deepened the liquidity crisis further and put pressure on both the money market and capital market. Depreciation of taka against the US dollar and frequent government intervention in the economic forces kept foreign investors worried. In 2018 and 2019, there was continued divestment of foreign investors' shares from Bangladesh's market.
Heavy selling pressure from foreign investors resulted in a massive correction of fundamentally good stocks in the market. Meanwhile, the dispute of the Bangladesh Telecommunication Regulatory Commission (BTRC) with Grameenphone – one of the leading telecom companies of the country with the highest market cap on the DSE – created concern among the investor community and the selling off of GP shares led to a massive fall in indices.
Some other factors also posing serious challenges to the market are: slow private credit growth, heavy government borrowing from the banking sector, forceful implementation of the single digit interest rate, currency devaluation along with slow business growth as a result of a growing cost of doing business, and a hike in electricity plus gas prices.
The tenure of the longest serving chairman of the regulatory body in the last decade failed to gain positive sentiment from the investors community and the broad index of the Dhaka bourse went down to almost 3,600 points in March 2020. To protect investors from continued free fall, the regulator introduced a floor price mechanism in March which is still in effect.
The trading activities on the capital market of Bangladesh remained suspended for more than two months during the countrywide general holiday period to limit the spread of the Covid-19 pandemic. Capital market experts blame the lack of technical inefficiencies to offer remote trading facilities for the long time market closures.
Meanwhile, a new team took the charge of the regulatory commission before resumption of the trading activities chaired by Professor Shibli Rubayat Ul Islam, who is popularly known as a visionary and dynamic person for his immediate past role at Dhaka University. I had the opportunity of an hours-long discussion with a newly appointed commissioner of BSEC a year ago. I found that he had some great thoughts and points to offer for the betterment of the market.
Within the shortest span of time, the newly formed commission has successfully gained positive sentiment from investors with a number of timely reforms and initiatives as well as punitive actions against wrongdoers in order to protect the investors' rights and interests in the market. The new commission took charge at a time when there was great fear concerning the economy and business outlook of the country due to the novel coronavirus outbreak which threatened stock market performance immensely.
However, the market was offering great potential too, at the same point of time, but most of its stakeholders failed to track it. The liquidity position of banks has improved significantly since May 2019. Though a number of listed companies were expected to be severely impacted by the countrywide general holidays during March-April and the persisting Covid-19 crisis. Some of the companies experienced a more than justified price correction even before the Covid-19 pandemic began.
As of June 2020, Bangladesh's market remained at one of the lower PE(x) regimes among its peer countries whereas world markets have seen strong recovery after the global market fall triggered by Covid-19 fears. Meanwhile, the Bangladesh Bank's policy support to invest in the ailing market – through scheduled banks under a special financing scheme along with the finance minister's declaration to offer the opportunity to inject undisclosed money in the stock market and the opportunity to whiten undisclosed bank deposits, NSC investment etc. – created demand-side stimuli for the market.
The most important driver for the strong market recovery was the successful implementation of the single digit interest rate. Historically, the capital market out-performed when the interest rate was lower. Empirically, it has been proven that there is a clear negative correlation between bank interest rate and stock market return.
As real return on bank deposits became close to zero or negative, while tightening regulation in NSC sales made its investment opportunity limited, the real estate sector remained sluggish. High illiquidity – with no other suitable investment alternatives stock market – and having deeply discounted price levels, remained the only available choice for investment with greater return potential.
Lucrative price levels of a number of stocks with low sensitivity to the Covid-19 crisis – like pharmaceuticals, consumer goods, power, and technology – were attractive investment tools for opportunity hunters. With the formation of a new commission, a pro-active regulatory regime is expected. We have seen that there is positive investors' sentiment with regard to the new commission and by June 2020, investors started to demonstrate some sort of activity with an expectation of market recovery driven by the above-mentioned forces.
In Bangladesh, along with demand-side issues, there are supply-side issues as well because of market inefficiencies. The money market has remained a primary choice for entrepreneurs and corporations for easy long term financing as there is an absence of sufficient incentives and an enforcement mechanism to list them on the market.
This practice is creating dis-equilibrium in the financial market and also high demand for loans creates a liquidity crunch. It increases the interest rates in the banking sector while the capital market remains unnoticed for long term financing. Also, average yields on the capital market investment in Bangladesh remain low
A significant delay in listing procedures, inadequate knowledge about the market and global standards and the spread of rumors and false information etc. raise wariness among both existing and potential investors. Mutual funds could be a tool to offer immature investors access to knowledgeable fund management services by expert investment professionals.
However, a number of past incidents and malpractice, as well as unwanted extensions, intervention and influences, have seriously damaged the reputation of the industry. Unit-holders' interest in the pooled funds were seriously compromised in the past.
In spite of all the issues, the capital market of Bangladesh offers enormous potential for growth. A lower market cap to GDP ratio also provides a lot of scope for the market to grow. Bangladesh's capital market has yet to reach its desired level. The market can be deemed as stable only if the mentioned issues are looked after in a just manner.
Systematically addressing all such challenges could lead to the long term stability of the market. At present, there is great optimism with the new regulatory body and its proactive stance is also helping investors regain their confidence in the market. However, we need to remain cautious so that great optimism does not create another bubble in the market and subsequent crisis.
Mohammad Asrarul Haque is a research analyst at a leading stock brokerage house.