Pitfalls of investment in the stock market
Ahmadul Ameen | Thursday, 29 May 2008
WHEN Dhaka Stock Exchange (DSE) launched web-based information, there was palpable excitement in that circle of non-resident Bangladeshis (NRBs) who were active investors in overseas markets and eager to invest in Bangladesh. Since live-prices could be followed through Internet, enthusiastic investors were in a position to trade in the DSE through phone calls and e-mails. Many of us took interest in the progress of the market and initiated equity investment in the DSE.
Investment scenario: In recent years, the growth and development of the stock market in Bangladesh have been impressive. One of the visible changes noted was the mushroom growth of the security houses and branches not only in Dhaka but also in the outlying areas. This is undoubtedly a positive development in respect of the growth of the capital market that allows commercial investors to source capital from stock market, while institutional and individual investors have an opportunity to diversify their investments. There has been significant growth in respect of market capitalisation and the market indices have climbed to a dizzying height. Having witnessed a few major market crashes, this scribe has a mixed feeling about the direction to which the market would be heading.
Some of the relevant observations worth noting:
1. Part of excess liquidity in the banks has gone into the stock market
2. Some merchant bank subsidiaries of the scheduled banks have been very aggressive in their margin lending resulting in frequent crossing of the legal threshold.
3. There has been a sizeable inflow of funds from overseas.
4. 'Undisclosed' and/or 'black' money has been flowing into the market that is currently shy of going go into more productive channels.
5. A number of state-owned companies have divested their shares, which have been snapped up eagerly by investors, and those shares are currently traded at very high Price Earning (PE) ratios. A case in point is the current PE of Jamuna oil has been hovering around 33 (134 PE at peak price), and that of Meghna Petroleum at 60.
6. When more shares of government-owned companies are divested followed by the telecom shares such as those of Grameenphone, there could be considerable mopping up of capital to affect the prices of other shares.
7. Inflow of overseas fund may slow as the prices of very limited blue chip shares go up.
8. The regulatory agencies correctly voice their fears about high prices of many stocks and they are conscious of the fact that the market exuberance needs to be checked through curbing excesses of margin trading. However, its approach appears to be half-hearted and weak-kneed in the face of market and investor reaction.
A very disturbing trend is the prevailing crazy prices for mutual funds that defy logic. A case in point - while the declared NAV of some mutual fund is below Tk 200, the market price is above Tk700. The syndicates are exploiting the naivet
Investment scenario: In recent years, the growth and development of the stock market in Bangladesh have been impressive. One of the visible changes noted was the mushroom growth of the security houses and branches not only in Dhaka but also in the outlying areas. This is undoubtedly a positive development in respect of the growth of the capital market that allows commercial investors to source capital from stock market, while institutional and individual investors have an opportunity to diversify their investments. There has been significant growth in respect of market capitalisation and the market indices have climbed to a dizzying height. Having witnessed a few major market crashes, this scribe has a mixed feeling about the direction to which the market would be heading.
Some of the relevant observations worth noting:
1. Part of excess liquidity in the banks has gone into the stock market
2. Some merchant bank subsidiaries of the scheduled banks have been very aggressive in their margin lending resulting in frequent crossing of the legal threshold.
3. There has been a sizeable inflow of funds from overseas.
4. 'Undisclosed' and/or 'black' money has been flowing into the market that is currently shy of going go into more productive channels.
5. A number of state-owned companies have divested their shares, which have been snapped up eagerly by investors, and those shares are currently traded at very high Price Earning (PE) ratios. A case in point is the current PE of Jamuna oil has been hovering around 33 (134 PE at peak price), and that of Meghna Petroleum at 60.
6. When more shares of government-owned companies are divested followed by the telecom shares such as those of Grameenphone, there could be considerable mopping up of capital to affect the prices of other shares.
7. Inflow of overseas fund may slow as the prices of very limited blue chip shares go up.
8. The regulatory agencies correctly voice their fears about high prices of many stocks and they are conscious of the fact that the market exuberance needs to be checked through curbing excesses of margin trading. However, its approach appears to be half-hearted and weak-kneed in the face of market and investor reaction.
A very disturbing trend is the prevailing crazy prices for mutual funds that defy logic. A case in point - while the declared NAV of some mutual fund is below Tk 200, the market price is above Tk700. The syndicates are exploiting the naivet