Is Bangladesh\\\'s stock market high or low?

If you ask stock investors whether Bangladesh's stock market is high or low in terms of stock prices, they will surely reply, it's low. If you ask them why it is so, they will refer to the prices of the stocks in 2010 and 2011.  But if you ask them what are the criteria of judging whether a stock market is high or low, a very few investors will be able to come up with an acceptable answer, or at least, with an answer which can throw some light on how to determine whether a market is high or low.
By any standard, Bangladesh's stock market is small with a market capitalisation of US$37 billion in an economy of more than $160 billion. How is a stock market judged whether it is high or low? It is normally by applying some statistics like price-earning ratios (P/E ratios), yield rates etc. However, these measurements again should be seen in the context of the overall condition of the economy. If the GDP (gross domestic product) growth rate is robust and it increases yearly, export growth is healthy, the economy is receiving required investment, inflation is under control and foreign exchange market is stable, then a rising P/E ratio is expected in the stock market. In this case, as corporate earnings are expected to go up, the yield rate - the rate of return on investment (ROI) - is also expected to rise, or at least, to remain constant. Now the main question is, what is the ideal price-earning multiple for a stock market like that of Bangladesh? There is no one answer to this question. Price-earning multiple of the market varies depending on other conditions of the economy as mentioned above. More important is the issue of investors' expectation. If expectation reigns high, then stocks will be sold at a higher price-earning multiple (P/E multiple). If expectation is low, then even normal P/E multiple will not hold.
In Bangladesh's stock market, at this moment investors' expectation is very low. The main reason for a low expectation is that after losing money in 2010 and 2011, many investors had already left the market, and with them the money also. Financial institutions, like banks, are also not free any more to invest in the market as they were before 2010, even up to 2012. In the recent months, the central bank came up with a heavy hand telling them to bring down their equity investment at or lower than 25 per cent of the paid-up capital or 'tier one' capital. Many banks are now selling their stocks from their investment portfolios to abide by the directives of the central bank.
The mutual fund managers also proved to be too poor in portfolio management. They lost investors' money even more than they would have lost had they themselves managed their own portfolios.
So, all around there are symptoms of failure and despair. On the other hand, the bank interest rate went up after July 2010, and that has not come down since then. High interest rate has acted as a cause for an outflow of money from the stock market. As money has an outflow, the prices of stocks have come down so much that it is beyond the belief of the investors.
Many investors now ask whether the market will make a turn-around. According to this writer, there is little hope.  The market will definitely make a turnaround provided the economy receives the required investment for a GDP growth rate of 7.0 per cent or beyond. With present investment and growth rate, no one should expect the market to go up that much. After all, the corporate world would draw its income from investment in the economy. Investment creates multiplier effects in the economy. Low investment means low multipliers for economic activities in the economy. The economy is not depressed, but it is not also buoyant. It is performing at a much lower level than its potentials.
The corporate reporting is not trustworthy in Bangladesh. Many of the corporate entities took money from the stock market because they could take it. The stock market route was an easy one to make quick money for many of the corporate sponsors. Lack of confidence did not come from nothing. Many factors only pushed down the investors' confidence over time. We do not know whether investors' confidence at this moment is at the lowest level.
With a 16 average P/E ratio, and with a 3.0 per cent or less yield rate, the market is not at the lowest level. We will not be surprised if the market undergoes further correction. Some policy support can, of course, help the market to go up. But more important thing is carrying out of the remaining reform programmes in the market, including passage of the proposed Financial Reporting Act in the Jatiya Sangsad.
The writer is a Professor of Economics, University of Dhaka. abuahmedecon@yahoo.com