A few weeks back stock market in Bangladesh reached almost in a state of terminal agitation or restlessness. Many innocent investors lost their fortune in this quagmire. They could not a-priori understood the pulse of the market and failed to trace the exit point. Thus about Tk 1.0 trillion was siphoned off from the capital market in a year and Price-to-Earnings Ratio or P/E Ratio hit the lowest pit. Frequently, the stock market in an underdeveloped capital market appears to be resting on a speculative bubble that does not follow any market norm. Traders in such a market are simply snobbish imitators and attitude or propensity of other traders dictates investment in stocks with an inflated value of P/E through manipulation of certain market fundamentals. The swings between bull and bear market are abrupt in many instances without any definite time-bound; bull market phase is ephemeral[a sharp spike] with a prolonged bear market phase.
Consider the DSE Broad Index for the year 2019. The bull market reached a maximum point of above 5875 levels at January 2019 that was very short-lived. The downswing started in February 2019 and could not attain a stable value in the neighbourhood Index value of 5000. The accelerated steep decline with erratic short-lived upswing reached the lowest ebb at 4000 at the end of the year. Investors thronged outside the Dhaka Stock Exchange to voice their anguish and correction of the market by regulators to bless investors with a profit. The stock market crash in 2010 happened due to market manipulation of a cohort of investors supported by liquidity glut and poor monitoring of regulators. The stock market crash of 1996 was different in several aspects; paper shares were sold without any circuit breakers and many investors lacked fundamental knowledge on the working of the stock market.Two weeks back, a Member of Parliament solicited intervention of Prime Minister to stabilize jerking in the market with palliative care. There was a spontaneous response from the executives of the BSEC and policymakers who discussed the issue with the Prime Minister to bring dynamism to the market with both short-term and long term measures. The short-term measures included the involvement of the banks and financial institutions in the stock market, arranging loans on easy terms for merchant bankers and institutional investors. The long terms measures included many conventional means such as incentives for foreign investors and strict enforcement of the norm of enlistment of profitable multinational and public limited companies in the capital market to enhance Initial Public Offerings. Some of these measures may bring immediate relief in the market with an upward revision of the index but the overall stability and upward swings in the Index depend on the rate of return and a few fundamentals related to the enlisted companies.
Stock market is designed to meet long term capital requirement and thus requires constant nurturing to assure investors that cost and risk associated with long term investment is compensated with reasonable return. The market cannot be stable and profitable when return on short term assets such as bank deposit, yield on Treasury bill and bonds are above the return of long term investment. The criteria to assess the return on stock should be earning or dividend yield and not the earnings per share. Capitalization of stock market and the incentive on investment is frustrating in Bangladesh because yield on stock in many instances is less than the return on money market instruments. Only two sectors; energy and telecommunications pay higher dividend yield in stock market and dividend yield in most of the other sectors is less than the Treasury bill and bonds. This is one of the prime reasons for reluctance of institutional investors and risk-averse individual investors in investment in the stock market. An upward swing in the Index depends on the economic performance of the enlisted companies. Investors gain confidence when they see real growth in the enlisted companies and vice versa.
Regulatory agencies can play a pivotal role in enlisting companies with sound fundamentals or enforce compliance on certain profitable ventures in stock market enlistment. It is prudent to enlist profit-making state-owned companies in the stock market to create a congenial environment and to boost the stymied equity market. The government has adopted pragmatic policies to offload shares of five state-run energy companies and contemplating to offload more shares in percentage terms of two already enlisted companies; Titas Gas Transmission and Distribution Company of Bangladesh and the Power Grid Company of Bangladesh. There can be other noble ventures such as conversion of certain profit-making authority into public limited company and offload their share in the market; suitable examples are completed bridge and airports. It is also incumbent on the government to bring a few profit-making multinationals in the capital market infrastructure to offload their share in the stock market, e,g, Metlife and Unilever.
The writer is a Professor of Economics, United International University. Email: [email protected]