High interest drags market down but it's bound to rebound: DBA president

High interest rate is one of the key factors behind the downward trend of the country's capital market that was expected to become upbeat and stable after the national election.
During an interview with The FE, Saiful Islam, president of the DSE Brokers Association, Bangladesh (DBA), brought comparison between Treasury bonds and listed securities and said the former were offering more lucrative return on investment, driving investors away from stocks.
The benchmark index of the Dhaka Stock Exchange (DSE) on Wednesday went below the 6000-mark after it lost 192 points in five sessions in a row. The turnover also fell below Tk 5 billion.
The annual yield of risk-free Treasury bonds has gone as high as 11 per cent or more. On the other hand, investment income from listed securities is very poor.
For example, a non-bank financial institution, also a blue-chip stock, declared a 15 per cent cash dividend on Tuesday for shareholders for 2023. An investor will get Tk 1.5 against the face value of Tk 10 per share. So, if he/she had purchased the company's shares at Tk 37 each [the stock's market price before the record date], the return comes to only 4 per cent.
Another multinational company has recently declared 100 per cent cash dividends and its stock price was above Tk 518 before the record date.
By purchasing the company's shares at Tk 518 each, an investor got a return of Tk 10 only. The annual yield in this case is only 1.93 per cent.
Meanwhile, deposit rates have also been increasing following the policy rate hikes by the central bank.
"A prudent investor definitely will prefer investments in risk-free government securities," said Mr Islam, also a director of Brac EPL Stock Brokerage.
The high inflation is another reason behind the shrinking flow of money in the equity market. People of the middle class and of lower-income groups do not want to take risk and lose control over money.
Those, who have money in stocks, are liquidating assets to bear living expenses.
Many investors have also become stuck with investments in poor-performing companies since the stocks were transferred to Z category.
What's the way out?
Sustainability of the equity market does not depend on artificial measures, said the DSE president.
The market automatically bounces back based on its own strength.
The curve of interest rate will stop climbing up after reaching the peak. The inflation will also be tamed at one stage. Then investors, who now prefer government securities, will return to the equity market.
After the national election, the government has taken steps to bring reforms in the banking sector.
Any reform brings a positive outcome in the long run. So, reforms in the banking sector will help the market to bounce back, said Mr Islam.
"The market is likely to gain a strong footing after Ramadan, as the macroeconomic scenario will improve," he added.

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