Making sense of the bull run

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Shamsul Huq Zahid
In recent weeks, people, particularly urbanites, have been discussing two topics. The first is the Prime Minister's recent state visit to neighbouring India. The second, of course, is the unending bull-run in the bourses.
The political heat generated over the outcome of the PM's visit would hopefully die down soon. But none seems to be sure about the sustainability of the stock bull that has rarely paused for a breather for the last few weeks. Investors might be relishing the trend but, possibly, not the securities regulator.
Every time the indices go up with prices of most stocks skyrocketing, many try to figure out what will happen next. Some people who watched the 1996 stock bubble burst closely tend to think the worst. But market insiders are confident that the recurrence of the 1996 collapse is highly unlikely as the market having strong monitoring in place is more mature than before.
None desires to witness the repeat of 1996-like scenario. But the logical question is: can the market sustain the bull-run for an indefinite period?
There is, of course, a basic difference between the current and 1996 market scenarios. It was retail investors who, unknowingly, stepped into well laid-out traps of highly influential market manipulators, propelled the market to its extreme and finally paid a heavy price.
But in today's market, it is none but institutional players are playing the key role. These players are awash with idle funds. With demand for funds from investors remaining low for domestic and external reasons, these investors have found the stock market to be a handy means for making money within the shortest possible time. They have decided to overlook the risk factors because the return from stock market comes at a very low cost and without much hassle. The institutions do not have to open branches or employ people to mobilize deposits, lend funds and recover the same.
The daily turnover, which has already crossed Tk 15 billion, does clearly indicate the strong involvement of the institutional investors. Even during the 1996 bubble days, the daily tour-over was nowhere near that of today.
It is obvious that institutional investors are not ordinary ones. They are expected to be doing their homework well before investing their funds in stocks. But one particular question might be agitating the minds of many: Is the current market sustainable for long? Occasional price corrections are very much natural. But if a bigger one happens, it is likely to send a panic-wave among general investors. Will then the institutional investors be able to stabilize the market, again, sooner?
All the encouraging words coming from the key functionaries of the country's premier bourse is unlikely to be of any help if the situation really turns sour. Rather, the accusing finger might be pointed out at them later, rightly or wrongly, if the most unwanted thing happens. Such functionaries are actually sitting on a hot seat and they should rather be cautious so that none can later liken their position to that of any pied-piper.
A strong capital market is one of the most desired national objectives. But if the prices of issues having price earning (PE) ratios between 90 and 150 or above increases three or four folds over a period of three to four months, this is not any sustainable indicator of a strong capital market. One cannot justify this situation even by any over-optimistic expectation about future price earning ratios.
In this backdrop, the investors do have some cogent reasons to be wary about the recent developments in the market.
For instance, investment in mutual funds is universally considered safe because of assured return at the end of the year. But how safe is an investment if one buys shares of a mutual fund at a price 10 times more the net asset value (NAV) of the same, if the NAV is calculated properly without any window-dressing of accounts, and, thus, not being undervalued.
Investments in mutual funds have witnessed a quantum leap these days. Furthermore, uncanny gossips or rumours seem to be going strong in the market. There is no denying that stock trading in any exchange is not always guided by any standard grammar book. Speculation cannot be avoided altogether in operations involving stocks. But there is a limit to such speculation.
In the present situation in the country's stock exchange, both the securities regulator and the management of the bourses are otherwise aware of it. Particularly, the regulator, apparently, is in a fix. It is not willing to take the blame of hurting the market by taking a few measures that do otherwise seem appropriate to rein in any abnormal rise of the market. But, if anything nasty, God forbid, happens ultimately, the SEC would also be at the receiving end of all criticisms, for not taking actions in time.
One would, however, appreciate the decision of the SEC asking the agencies concerned to redeem their eight open-ended mutual funds by 2011. But the investors have not able to get the right signal from this well-intended decision. They have, very wrongly, gone crazy about buying the same mutual funds at unreasonably high prices.
Last Monday, following the SEC's decision not to contest the High Court verdict that allowed mutual funds to declare stock dividends or right shares, investors stumbled on each other for buying all the eight mutual funds slated for redeeming. When the funds would be redeemed, investors would get back funds equivalent to the NAV of the shares.
It is high time to take stock of the market situation, rationally, so that appropriate reflex actions can be taken to facilitate a steady course for the market without triggering any panic.