Capital market rescue package and market reaction
Sunday, 1 January 2012
The current state of capital market seems to be very unlikely, unexpected and somewhat ridiculous on. The long-cherished market rescue package is not producing any good results for advancement of general market index! We are really perplexed by looking at the falling trend of general index of the country's two bourses -- Dhaka Stock Exchange (DSE) and Chittagong Stock Exchange (CSE) of our capital market.
On November 23, 2011 that the capital market regulatory boss -- the Securities and Exchange Commission (SEC) -- came up with the much-expected market stabilisation package. The 21-point stock market rescue package primarily focused on greater participation of banks and other financial institutions in the market.
The major incentives include, among others, a special scheme aimed at helping the small investors to recoup their losses, a 10 per cent tax cut on the profits earned, mandating the purchase of at least 30 per cent of stakes of the listed companies by the sponsor-directors, exclusions of 'exposure to stock market' for bank loans to their subsidiaries, consideration of exposure limit to the stock market on a 'net-off' basis, instead of 'mark-to-market' basis, launching of 'Investment Advisory Service' and 'Equity Research Publication' to make all the market relevant information available to the stakeholders in pursuit of making the market as efficient one, issuance of corporate governance framework and formulation of Financial Reporting Act (FRA) for enhanced transparency, accountability and auditing disclosure of the listed companies, upgradation of insider trading rules and finally declaration for demutualisation of the two stock exchanges very soon.
Prior to this stabilization package, the Ministry of Finance restructured the SEC with 'competent persons' who possess both practical and professional knowledge to help bring about the managerial efficiency and enforce properly transparency in the market operations for the sake of greater development of the country's stock market.
In addition, the Investment Corporation of Bangladesh (ICB) announced the creation of Tk 50 billion Bangladesh Fund (syndicated fund) as part of measures to the share market recovery where four state-owned banks (Sonali, Rupali, Agrani and Janata), and Sadharan Bima Corporation, Jiban Bima Corporation and Bangladesh Development Bank Limited are the co-sponsors of the fund.
Furthermore, Bangladesh Association of Banks (BAB), a platform of private banks, announced that it would create a Tk. 50 billion fund-Stock Stabilisation Fund (SSF) - to help stimulate the capital market. The fund will be operating through an asset management company (AMC), which will buy and sell stocks independently where it is expected that professionalism, accountability and transparency will be primed.
Despite the announcement of many multifarious measures, the stock market is not responding in a positive manner and is thus still to move on the right track. This phenomenon is the upshot of the investors' inability to forecast the prospects of the market and understand the valuation of the shares. The verdict responsible for the current state of the capital market crunch is the less availability of liquidity in the money market and withdrawal of institutional and big investors from making investments.
At present, all the shares that are being traded in the market are undervalued. Unfortunately, investors are not interested to do, fundamental analysis, rather they mostly depend on the rumors that have hardly any real basis. This is high time for the investors to invest in the market even if they had suffered heavy losses previously. This might be a wise decision in pursuit of adjusting their earlier losses. The ball is now in the investors' court and they have to play actively to facilitate the market to bounce back, in their greater interest.
A volatile trend in the market is the reflection of the investors' confusion and lack of confidence towards the prospects of the market. The basic problem behind the scenario is the investors' dependence on others for decision-making in spite of making own judgment, based on the established knowledge and prudence. In essence, investors of diverse groups need to gain the basic knowledge about making wise decision and safe investment. A relevant question comes to our mind: how long will the investors keep on pouring their funds into the share market knowing nothing about the fundamentals of shares?
Since the market has already fallen much below than what it should ideally be, there is certain chance to gain if the investors come up with fresh investment. The investors need to come forward to investing to reap the benefits of availing themselves of the opportunity of buying the shares at their existing low prices in the market. It will be an unrealistic expectation of investors if they think the market would only go up. Ups and downs are very natural for the capital markets across the globe. When there is a sharp fall in the index of share prices, the investors even demonstrate putting pressure upon the government and this practice must be avoided to run the market in its own way.
In the context of Bangladesh, investors in general and retail investors in particular, are not used to receiving or making any kind of formal analysis, ranging from fundamental to technical ones. Rather, our market is driven by the theory of behavioural finance which calls for the application of the psychology to make financial decisions rather than doing fundamental analysis. This is why, the securities are mispriced in our stock market and, in essence, the market is inefficient. This scenario, however, is common in every developing country like ours where the presence of uneducated investors is significant and most of them rush to market for making investment, mainly on the basis of rumors.
The evidence from the western countries illustrates that stock market crash recovery requires some time to bounce back to its usual phenomenon. Time will help recover the market and we have to wait for that. The investors need to enter into the market as early as possible for making fresh investment as the commercial banks will enter into the market with a significant volume of investment at the end of the December 2011 after the closure of their annual financial accounts and prepare their annual reports. In addition, the move of the sponsor-directors to purchase the 30 per cent stake of their companies as part of meeting the regulatory requirement will surely provide a boost to the price of the shares in general.
The last day of trading of the calendar year, 2011, did otherwise show some positive trends where the benchmark general index of the Dhaka Stock Exchange-DGEN, advanced 36.94 points to 5,257.60. The turnover, in terms of value, also increased to Tk 5.60 billion against Tk 5.26 billion in the previous day. In addition, total market capitalization of the DSE advanced to Tk 2,616.73 billion against Tk 2,600.26 billion in the previous session.
The writer is an MBA student of Department of Banking at the University of Dhaka. He can be reached at palashdu007@gmail.com
On November 23, 2011 that the capital market regulatory boss -- the Securities and Exchange Commission (SEC) -- came up with the much-expected market stabilisation package. The 21-point stock market rescue package primarily focused on greater participation of banks and other financial institutions in the market.
The major incentives include, among others, a special scheme aimed at helping the small investors to recoup their losses, a 10 per cent tax cut on the profits earned, mandating the purchase of at least 30 per cent of stakes of the listed companies by the sponsor-directors, exclusions of 'exposure to stock market' for bank loans to their subsidiaries, consideration of exposure limit to the stock market on a 'net-off' basis, instead of 'mark-to-market' basis, launching of 'Investment Advisory Service' and 'Equity Research Publication' to make all the market relevant information available to the stakeholders in pursuit of making the market as efficient one, issuance of corporate governance framework and formulation of Financial Reporting Act (FRA) for enhanced transparency, accountability and auditing disclosure of the listed companies, upgradation of insider trading rules and finally declaration for demutualisation of the two stock exchanges very soon.
Prior to this stabilization package, the Ministry of Finance restructured the SEC with 'competent persons' who possess both practical and professional knowledge to help bring about the managerial efficiency and enforce properly transparency in the market operations for the sake of greater development of the country's stock market.
In addition, the Investment Corporation of Bangladesh (ICB) announced the creation of Tk 50 billion Bangladesh Fund (syndicated fund) as part of measures to the share market recovery where four state-owned banks (Sonali, Rupali, Agrani and Janata), and Sadharan Bima Corporation, Jiban Bima Corporation and Bangladesh Development Bank Limited are the co-sponsors of the fund.
Furthermore, Bangladesh Association of Banks (BAB), a platform of private banks, announced that it would create a Tk. 50 billion fund-Stock Stabilisation Fund (SSF) - to help stimulate the capital market. The fund will be operating through an asset management company (AMC), which will buy and sell stocks independently where it is expected that professionalism, accountability and transparency will be primed.
Despite the announcement of many multifarious measures, the stock market is not responding in a positive manner and is thus still to move on the right track. This phenomenon is the upshot of the investors' inability to forecast the prospects of the market and understand the valuation of the shares. The verdict responsible for the current state of the capital market crunch is the less availability of liquidity in the money market and withdrawal of institutional and big investors from making investments.
At present, all the shares that are being traded in the market are undervalued. Unfortunately, investors are not interested to do, fundamental analysis, rather they mostly depend on the rumors that have hardly any real basis. This is high time for the investors to invest in the market even if they had suffered heavy losses previously. This might be a wise decision in pursuit of adjusting their earlier losses. The ball is now in the investors' court and they have to play actively to facilitate the market to bounce back, in their greater interest.
A volatile trend in the market is the reflection of the investors' confusion and lack of confidence towards the prospects of the market. The basic problem behind the scenario is the investors' dependence on others for decision-making in spite of making own judgment, based on the established knowledge and prudence. In essence, investors of diverse groups need to gain the basic knowledge about making wise decision and safe investment. A relevant question comes to our mind: how long will the investors keep on pouring their funds into the share market knowing nothing about the fundamentals of shares?
Since the market has already fallen much below than what it should ideally be, there is certain chance to gain if the investors come up with fresh investment. The investors need to come forward to investing to reap the benefits of availing themselves of the opportunity of buying the shares at their existing low prices in the market. It will be an unrealistic expectation of investors if they think the market would only go up. Ups and downs are very natural for the capital markets across the globe. When there is a sharp fall in the index of share prices, the investors even demonstrate putting pressure upon the government and this practice must be avoided to run the market in its own way.
In the context of Bangladesh, investors in general and retail investors in particular, are not used to receiving or making any kind of formal analysis, ranging from fundamental to technical ones. Rather, our market is driven by the theory of behavioural finance which calls for the application of the psychology to make financial decisions rather than doing fundamental analysis. This is why, the securities are mispriced in our stock market and, in essence, the market is inefficient. This scenario, however, is common in every developing country like ours where the presence of uneducated investors is significant and most of them rush to market for making investment, mainly on the basis of rumors.
The evidence from the western countries illustrates that stock market crash recovery requires some time to bounce back to its usual phenomenon. Time will help recover the market and we have to wait for that. The investors need to enter into the market as early as possible for making fresh investment as the commercial banks will enter into the market with a significant volume of investment at the end of the December 2011 after the closure of their annual financial accounts and prepare their annual reports. In addition, the move of the sponsor-directors to purchase the 30 per cent stake of their companies as part of meeting the regulatory requirement will surely provide a boost to the price of the shares in general.
The last day of trading of the calendar year, 2011, did otherwise show some positive trends where the benchmark general index of the Dhaka Stock Exchange-DGEN, advanced 36.94 points to 5,257.60. The turnover, in terms of value, also increased to Tk 5.60 billion against Tk 5.26 billion in the previous day. In addition, total market capitalization of the DSE advanced to Tk 2,616.73 billion against Tk 2,600.26 billion in the previous session.
The writer is an MBA student of Department of Banking at the University of Dhaka. He can be reached at palashdu007@gmail.com