Stock market distortions and secondary bond market
Sunday, 7 December 2008
The continuous slide in stock prices in the country's two bourses for the last couple of months has taken a heavy toll on the investors. With many investors withdrawing themselves from a lacklustre market, the daily turnover at the main bourse, the Dhaka Stock Exchange (DSE), has declined to less than one-third of that during the period when the market was at its peak in July-August period. There are, obviously many underlying reasons for the market being in the downbeat mood. But the fact remains that no market can remain buoyant all the time and there would be always ups and downs. So, there is no reason to be upset about the ongoing stock price correction. But one should have enough reasons to be concerned about the factors that often trigger an upsurge in stock prices, which, however, does not last for a long period. Factors which evoke investors' interest in the markets elsewhere do not usually come into play in Bangladesh. It has its own way of behaving with a large number of investors ignoring the basics of investment in stock market, the company fundamentals being at the top.
The central bank in a recent report has highlighted the major weaknesses of the Bangladesh stock market, including inadequate reflection of the company fundamentals and risks of insider trading. Both inadequate reflection of the fundamentals of listed issues and insider trading have the potential to give rise to market volatility. It is the responsibility of the listed companies, the Securities and Exchange Commission (SEC) and the bourses to keep the investors informed adequately about the fundamentals. The information gap in this particular area does create scopes for the investors for being misguided. The companies concerned do need to present before their shareholders the true financial strength and future prospects through proper auditing. If any company fails to comply with such an important obligation, the securities regulator has enough power to take such a company to task. But, unfortunately, all the stakeholders, including the companies concerned, the regulator, the bourses and all-important investors have never taken the issue of company fundamentals seriously. This has led to uninformed investment by the investors in companies having poor or not-so-impressive track record.
As far as the issue of insider trading is concerned, one would find everyone involved in stock market denying its presence. The SEC and the bourses would claim near elimination of the vice through effective monitoring. Yet proper investigations would reveal its presence. There are other manipulative activities that the central bank report has not mentioned. However, the combined effects of all the lapses have resulted in average unaffordable price-earning (P/E) ratio, which was 22.8 in June last. Actually, in some cases, the PE is found to be as high as 40 to 60. The central bank with a view to reducing almost a blind chase for stocks, has suggested the development of a strong secondary bond market where the investors would have the opportunity of getting attractive and risk-free return on their investment. Such a bond market would also emerge as a strong alternative to long-term lending by companies from financial institutions, including banks.
The central bank in a recent report has highlighted the major weaknesses of the Bangladesh stock market, including inadequate reflection of the company fundamentals and risks of insider trading. Both inadequate reflection of the fundamentals of listed issues and insider trading have the potential to give rise to market volatility. It is the responsibility of the listed companies, the Securities and Exchange Commission (SEC) and the bourses to keep the investors informed adequately about the fundamentals. The information gap in this particular area does create scopes for the investors for being misguided. The companies concerned do need to present before their shareholders the true financial strength and future prospects through proper auditing. If any company fails to comply with such an important obligation, the securities regulator has enough power to take such a company to task. But, unfortunately, all the stakeholders, including the companies concerned, the regulator, the bourses and all-important investors have never taken the issue of company fundamentals seriously. This has led to uninformed investment by the investors in companies having poor or not-so-impressive track record.
As far as the issue of insider trading is concerned, one would find everyone involved in stock market denying its presence. The SEC and the bourses would claim near elimination of the vice through effective monitoring. Yet proper investigations would reveal its presence. There are other manipulative activities that the central bank report has not mentioned. However, the combined effects of all the lapses have resulted in average unaffordable price-earning (P/E) ratio, which was 22.8 in June last. Actually, in some cases, the PE is found to be as high as 40 to 60. The central bank with a view to reducing almost a blind chase for stocks, has suggested the development of a strong secondary bond market where the investors would have the opportunity of getting attractive and risk-free return on their investment. Such a bond market would also emerge as a strong alternative to long-term lending by companies from financial institutions, including banks.