DSE sixth best performing exchange in the world until November
Tuesday, 30 December 2008
Equity Partners Limited
The year 2008 was perhaps one of the worst years after the great depression for a global equity investor. In the first part of the year, the global credit crisis took its toll and equity prices had started to fall. In the latter months, when it was evident that the world was heading for a recession, stock prices started to plummet like a sack of potatoes. According to the Economist, the UK-based prestigious magazine, "American mutual-fund assets have declined by USD 2.4tn - a fifth of their value - since the start of 2008; in Britain, the drop is more than a quarter, or almost BP 130bn (USD 195bn). The value of global stock markets has shrunk by maybe USD 30tn, or roughly half. These figures put the losses on credit-related securities, where the financial crisis began, into the shade". Indeed, it was a bad year for equity investors.
While the global stock markets have taken a beating, the Dhaka and Chittagong stock exchanges have performed reasonably well. According to Bloomberg, the New York-based financial information services company, for the first eleven months of 2008, the Dhaka Stock Exchange (DSE) was the sixth best performing exchange in the world on a currency adjusted basis.
The Global Stock Market: To understand the extent of the collapse of the global stock markets, we use the MSCI International Equity Indices. MSCI International Equity Indices are the most widely used global benchmarks in the industry. They are used to benchmark more than an estimated USD 3tn in assets, by over 2,200 institutions globally and for over 90% of all international equity assets under management in the US.
Calculated since 1969, the indices have become integral tools in the investment process of international investors and are used for research, in asset allocation models, to benchmark and conduct performance measurement analysis. As on December 11, 2008, the MSCI International Equity Indices gave the following picture:
From the table above, it is evident that, worldwide stock markets performed poorly. In many regions, the drop in some equity values were in excess of 50%, and all the indices lost more than one-third of their value.
Individual Stock markets: Although the MSCI international Equity Indices give us important insights into how the stock markets as a whole world-wide performed, it is still important to look at the performance of some of the most important stock markets of the world. According to the data collected by the World Federation of Exchanges, we find the following performances for the first eleven months of 2008.
According to the 23 indices provided above, we find that the Dhaka Stock Exchange has performed the best in comparison with the other important stock exchanges.
After looking at the individual stock markets, it is pertinent to look closer at the stocks markets that have performed the worst in 2008. Among the worst performing stock markets in 2008, the fall of the BRIC stock markets like bricks is quite notable.
The BRICs: The BRIC (Brazil, Russia, India and China) stock exchanges had some attributes in common. All of these stock markets had a high participation of foreign portfolio investors. When the stock markets in the US and the other developed countries started to go down, foreign portfolio investors started to sell off their shares and their holding of foreign currency to cover losses elsewhere.
The sell-off triggered unexpected losses and also put pressure on their currency. For example, in India, foreign portfolio investors, who last year put in USD 17.4bn have turned tail.
This has put pressure on the rupee, which has lost some 20% of its value against the dollar since January, when the market peaked.
The same thing happened in the case of Russia, but in a different form. In early 2008, Mr. Putin had boasted that the net inflow of capital had reached USD 80n last year and total foreign investment had risen to 9.0% of Russian GDP.
But only a quarter of this was foreign direct investment; the rest came in the form of loans and portfolio investments. As Kirill Rogov of the Institute of Economy in Transition, a think tank, explains, this reflected the strength of Russia's reserves and the weakness of its investment climate. Whereas other emerging economies were fighting tooth and nail for direct investment, Russia was borrowing cheaply instead, he says.
When the oil prices started to fall, foreign banks stopped lending and money began to flow out of Russia, it became clear that the economy was more vulnerable and more highly leveraged than many investors wanted to believe. The fall in the stock market mattered because Russian firms had borrowed heavily against their shares and faced margin calls from their foreign creditors.
While the fall in equity prices in India and China started immediately after the turn of the year, in the case of Russia and Brazil, it started in the middle of the year.
Dhaka Stock Exchange: In absolute terms, Dhaka Stock Exchange (DSE) had a mixed year. In the first half of the year, the stock exchange went up significantly. This rise was due to a number of factors. The year-end for banks and other financial institutions is December.
They started to declare their results in the first few months of the year. As their results came in, and the results were very healthy, these stock prices started to go up, which was reflected in the rise of the index.
The role of regulation cannot be ignored here. It was expected that reforms would take place in the non-bank financial institutions, and the insurance sector, which spurred the sharp rise in prices in these sectors.
The banks were already expected to give heavy stock dividends as a requirement to be compliant with Basel II. All these factors meant that the index was on the up.
The second half of the year was a time of decline. True that the stock and cash dividends were adjusted, however, the correction in the stock prices was much larger. There is little dispute that the market had been overheated in the first six months, and a correction was long overdue.
At the same time, some other factors also started to concern the retail investors. Retail investors started to worry about the foreign portfolio investors pulling out their money as they did in Russia, India, China, and many other countries.
The news coming from the developed and the developing world about the ramifications of the credit crunch and the overall downturn in the global economy exacerbated their fears.
At the same time, the uncertainty about the political situation started to put off investors in investing money in the bourses. Also, the second half of the year celebrated two major religious festivals, which is generally a slag time for investors. All these factors culminated into the down-turn in the second of the year.
However, in the last month of the year, we find retail investors again finding interest to invest. A large part of this renewed interest can be attributed to the prudent actions of our regulators and the media.
They rightly stressed that the current credit crunch in the global economy will not impact us greatly as we are not that leveraged, and complex instruments do not exist here.
They also rightly stressed that, the global recession will not affect us in a large way, as our economy is largely insulated from the negative aspects of the downturn.
The political uncertainty has been largely diminished as the country's major parties contested in the ninth parliamentary elections.
If past performance an indicator for future behaviour, the elections will give a genuine boost to the stock exchanges and the economy as whole. We all hope for a good year in 2009 in the stock exchanges. Happy investments every body. (Equity Partners Limited (EPL) is a full-fledged investment bank. The readers may reach EPL at research@eplbangladesh.com)
The year 2008 was perhaps one of the worst years after the great depression for a global equity investor. In the first part of the year, the global credit crisis took its toll and equity prices had started to fall. In the latter months, when it was evident that the world was heading for a recession, stock prices started to plummet like a sack of potatoes. According to the Economist, the UK-based prestigious magazine, "American mutual-fund assets have declined by USD 2.4tn - a fifth of their value - since the start of 2008; in Britain, the drop is more than a quarter, or almost BP 130bn (USD 195bn). The value of global stock markets has shrunk by maybe USD 30tn, or roughly half. These figures put the losses on credit-related securities, where the financial crisis began, into the shade". Indeed, it was a bad year for equity investors.
While the global stock markets have taken a beating, the Dhaka and Chittagong stock exchanges have performed reasonably well. According to Bloomberg, the New York-based financial information services company, for the first eleven months of 2008, the Dhaka Stock Exchange (DSE) was the sixth best performing exchange in the world on a currency adjusted basis.
The Global Stock Market: To understand the extent of the collapse of the global stock markets, we use the MSCI International Equity Indices. MSCI International Equity Indices are the most widely used global benchmarks in the industry. They are used to benchmark more than an estimated USD 3tn in assets, by over 2,200 institutions globally and for over 90% of all international equity assets under management in the US.
Calculated since 1969, the indices have become integral tools in the investment process of international investors and are used for research, in asset allocation models, to benchmark and conduct performance measurement analysis. As on December 11, 2008, the MSCI International Equity Indices gave the following picture:
From the table above, it is evident that, worldwide stock markets performed poorly. In many regions, the drop in some equity values were in excess of 50%, and all the indices lost more than one-third of their value.
Individual Stock markets: Although the MSCI international Equity Indices give us important insights into how the stock markets as a whole world-wide performed, it is still important to look at the performance of some of the most important stock markets of the world. According to the data collected by the World Federation of Exchanges, we find the following performances for the first eleven months of 2008.
According to the 23 indices provided above, we find that the Dhaka Stock Exchange has performed the best in comparison with the other important stock exchanges.
After looking at the individual stock markets, it is pertinent to look closer at the stocks markets that have performed the worst in 2008. Among the worst performing stock markets in 2008, the fall of the BRIC stock markets like bricks is quite notable.
The BRICs: The BRIC (Brazil, Russia, India and China) stock exchanges had some attributes in common. All of these stock markets had a high participation of foreign portfolio investors. When the stock markets in the US and the other developed countries started to go down, foreign portfolio investors started to sell off their shares and their holding of foreign currency to cover losses elsewhere.
The sell-off triggered unexpected losses and also put pressure on their currency. For example, in India, foreign portfolio investors, who last year put in USD 17.4bn have turned tail.
This has put pressure on the rupee, which has lost some 20% of its value against the dollar since January, when the market peaked.
The same thing happened in the case of Russia, but in a different form. In early 2008, Mr. Putin had boasted that the net inflow of capital had reached USD 80n last year and total foreign investment had risen to 9.0% of Russian GDP.
But only a quarter of this was foreign direct investment; the rest came in the form of loans and portfolio investments. As Kirill Rogov of the Institute of Economy in Transition, a think tank, explains, this reflected the strength of Russia's reserves and the weakness of its investment climate. Whereas other emerging economies were fighting tooth and nail for direct investment, Russia was borrowing cheaply instead, he says.
When the oil prices started to fall, foreign banks stopped lending and money began to flow out of Russia, it became clear that the economy was more vulnerable and more highly leveraged than many investors wanted to believe. The fall in the stock market mattered because Russian firms had borrowed heavily against their shares and faced margin calls from their foreign creditors.
While the fall in equity prices in India and China started immediately after the turn of the year, in the case of Russia and Brazil, it started in the middle of the year.
Dhaka Stock Exchange: In absolute terms, Dhaka Stock Exchange (DSE) had a mixed year. In the first half of the year, the stock exchange went up significantly. This rise was due to a number of factors. The year-end for banks and other financial institutions is December.
They started to declare their results in the first few months of the year. As their results came in, and the results were very healthy, these stock prices started to go up, which was reflected in the rise of the index.
The role of regulation cannot be ignored here. It was expected that reforms would take place in the non-bank financial institutions, and the insurance sector, which spurred the sharp rise in prices in these sectors.
The banks were already expected to give heavy stock dividends as a requirement to be compliant with Basel II. All these factors meant that the index was on the up.
The second half of the year was a time of decline. True that the stock and cash dividends were adjusted, however, the correction in the stock prices was much larger. There is little dispute that the market had been overheated in the first six months, and a correction was long overdue.
At the same time, some other factors also started to concern the retail investors. Retail investors started to worry about the foreign portfolio investors pulling out their money as they did in Russia, India, China, and many other countries.
The news coming from the developed and the developing world about the ramifications of the credit crunch and the overall downturn in the global economy exacerbated their fears.
At the same time, the uncertainty about the political situation started to put off investors in investing money in the bourses. Also, the second half of the year celebrated two major religious festivals, which is generally a slag time for investors. All these factors culminated into the down-turn in the second of the year.
However, in the last month of the year, we find retail investors again finding interest to invest. A large part of this renewed interest can be attributed to the prudent actions of our regulators and the media.
They rightly stressed that the current credit crunch in the global economy will not impact us greatly as we are not that leveraged, and complex instruments do not exist here.
They also rightly stressed that, the global recession will not affect us in a large way, as our economy is largely insulated from the negative aspects of the downturn.
The political uncertainty has been largely diminished as the country's major parties contested in the ninth parliamentary elections.
If past performance an indicator for future behaviour, the elections will give a genuine boost to the stock exchanges and the economy as whole. We all hope for a good year in 2009 in the stock exchanges. Happy investments every body. (Equity Partners Limited (EPL) is a full-fledged investment bank. The readers may reach EPL at research@eplbangladesh.com)