It is perplexing to note that the Dhaka stock market prices are rising continuously, adding 700 points in three weeks. Has anything good happen in the economy that could push the stock price that high? We do not find any except that term interest rate has gone down from 13 per cent to 9.0 per cent or lower. Yes, term interest rates have a relation with stock prices, but the result cannot be felt so early and so much.
The worrying aspect is that prices of all the stocks, irrespective of their fundamentals, have been rising. What does this mean? Are not the investors very seriously (or erroneously!) thinking that stock prices in future will move only to one direction - they will rise, and it is better to grab as much stocks as possible at the present price? This is dangerous. Every time a disaster strikes a stock market, it is because of this type of psyche.
The next important question is whether the present rise is alluring new investors to the market or the old investors have come up with more money. The good thing still for the market is that not many new investors entered the market this time as in 2009 and 2010. But for sure, old investors, who stayed with the market, are bringing in more money. Many of these investors took away money from this market in 2010 by selling their stocks at unbelievably high prices. Now some of them are again coming back to the market by encashing their long-term bank deposits. But will they again win and be able to rob the pockets of countless naive investors who understand the matters late and who suffer from a mental set-up of more greed and expectation?
Thank God, this time the market does not have 3.3 million active investors as in 2010 when most of the investors were new entrants and devoid of any kind of financial literacy. In the absence of too many innocent investors, whom will the market sharks bite this time? Yes, for them it will not be difficult. The difference will be, this time the bite will not be that painful, or it will not be such that will rock the earth. This time, thousands of losing investors will not take to the streets but they will look at each other with dismay and despair when anything bad happens to them. In other words, this time stock index will not go up to a level that will create a feverish condition all around.
But the market sharks know how to suck blood, if not eat the flesh, from the investors' irrational behaviour. We wonder what kind of shelter the ordinary investors will take this time when the current bull run will give in to a bear run. Will the regulator come up to rescue them? There's little hope. At the end, a series of scams will take place, but very few will notice them this time.
When we ask ordinary investors how far can the market rise, they say, much higher than the present level. Very often, they compare the market with that of the level of 2010. Many even argue that, as the market has added more companies through IPOs (initial public offering), the stock price index should go beyond that of the 2010 level. Unimaginable! If this is the expectation, then the market can go up to anywhere but everyone will get a disastrous result soon. Before we encourage a further rise of the market, we must ask ourselves what the sustainable level for the market is. Has anything extraordinarily good happened to the economy, or have the clouds that gathered on the political horizon gone away? We see no big change anywhere, neither in the economic field nor in the political arena. Things are as usual.
Then what has caused the stock prices to behave so bullish? Most of the stocks in the Bangladesh market are of junk type of one kind or another. The prices of stocks, which did not give any dividend, also skyrocket. In two to three weeks' time, some stock prices simply get doubled or beyond. Now prices of 'Z' group stocks are also moving up.
It is an irony that the Dhaka stock market has produced very few investors who buy stocks and hold them for a long period. Most of the so-called investors in the Dhaka market are traders. They buy stocks and sell them as soon as those stocks are credited to CDBL accounts. This type of market is ripe for gambling: big gamblers have an edge over the small ones. There are fundamentals of the stocks which normally should determine the level of stock prices. But how many of the stock investors read them or know how to read them?
The writer is a Professor of Economics, University of Dhaka. abuahmedecon@yahoo.com
