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Slide in stock prices

Abu Ahmed | January 25, 2018 00:00:00


Stock prices go up and down in their own ways. Nobody can stop their slide, nor can anybody push them up. Price of a particular stock can be caused to go up by creating more demand for it and in the same way, can be made to go down by arranging more supply of the same. Stock market as a whole can go up depending on supply of money and also can go down depending on outage of money from it. Investors' expectation also plays a role in pushing stock prices up and in the same way, investors' pessimism plays a role in pushing stock prices down.

Stock prices are determined by a host of factors among which performance of a particular stock in respect of its earning matters most. Price of a particular stock may go up provided investors hold any positive view of its future potentiality. For some stocks, the future matters more than the present while investors decide at what prices they would buy them. No single criterion is good enough to determine the price of a stock.

Investors consider all the probable events of the present and of the future while purchasing a stock at a price. The macroeconomic variables like growth in Gross Domestic Product (GDP), reserve of foreign exchange, type of investment in the economy, interest rates and export and import matter while deciding prices of stocks. Good governance in the listed companies and enforcement of regulations also matter.

Above all, quality of the stocks listed with the bourse is a more important determining factor at what prices the listed stocks will be transacted. The year 2017 was good for stocks in terms of upward movement of its prices, but the month of December of the same year and January of 2018 seemed to have come as a shock to the stock investors as they saw stocks losing values. In December 2017 and January 2018, the stocks' price index lost over 200 points, came down from a level of few points above 6300 to below 6100. Loss of 200 points is not a big one as after all, the market moved to that position, in a very short period, from a level of 5700 or so.

The rise of the 500 points was mostly contributed by a rise in the prices of banks' stocks. But from the beginning of the month of November 2017, bank stocks saw a correction, which continued up to the middle of January 2018. Bank stocks rose from a very low base. In the period between 2014 and 2016, these stocks were at or around half of prices of what the prices for the same were in the middle of the year 2017. Banks' equity base is much more larger than the same for other types of the listed companies, and once banks' stocks lose investors' confidence, for one reason or the other, sliding of price index takes place almost with a no stoppage. Now investors wonder whether prices of bank stocks will come down further to the level of where they were in 2015 and 2016.

If it happens, the market will undergo a further correction. Many investors were trying to find out the reasons for recent slides in stock prices. Most of them thought that the order of the Bangladesh Bank to decrease the advance deposit ratio (ADR) by commercial banks was one of the major reasons. They also blamed factors like liquidity crunch in the banking sector and the recent trend in the rise of interest rates. Whatever might be the reasons, the market did not go down to a level that should cause a concern or create a condition of panic for the investors.

When the market goes up without any valid reason, it may come down also without any valid reason. Investment in stocks is a risky venture which Bangladesh portfolio investors should by this time have known. The basic problem with Bangladesh's stock market is not where prices should go but shortage of quality stocks in it. How many quality stocks are there in which the investors can take a long-term position? Not many; may be, something between 25 and 30. This is the assessment of this writer; others may disagree. Also, stocks in Bangladesh's market are not cheap when their quality is taken into account.

The present level of a price index around 6000 points is sustainable but beyond that, this writer fears, the market may not remain sustainable. Many investors may say our stock market is cheap when seen in terms of present average price-earning ratio. But the truth is that the price-earning ratio also depends on the quality of stocks and how the investors perceive the future trend of the market. Without taking the local factors into consideration if we compare our markets' p/e ratio with the global p/e ratio, it will be a misnomer.

Stock market will receive a boost if the policymakers decide to reduce corporate income tax for the listed companies. In other countries, this tax is much lower than ours. In the absence of any concrete incentive in the system, investors cannot hope for the market going up further.

The writer is Professor of Economics University of Dhaka

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