Stock market moves to erratic track

Md Toufique Hossain The stock market is considered the primary indicator of a country's economic strength and development. Share prices tend to rise or remain stable when an economy in general shows signs of stability and growth and vice versa. But the current bearish trend enforces the investors' fear about further instability in the market and that is why they are selling off shares hastily. On their part, the market regulator and the central bank took some positive regulatory measures such as banning share sales by sponsors, withdrawing sectoral investment restrictions on mutual funds, and extending the time-frame to adjust merchant banks' single borrower exposure limit. But all those decisions are not stopping the continuous drop or decline of the index. Sometimes, investors react to rumour and gossip. This can have an impact on the stock market. If a rumour is spread that a company is experiencing financial difficulty or facing a product recall, investors will quickly unload its stock. If a company's stock is suddenly hyped by a so-called stock expert, investors will flock to it, and the price will soar. Above all, institutional investors are yet to be active in the market and a worsening economic situation is keeping the investors at bay as some groups are possibly trying to push the market down, so that they can later buy shares at low prices. Stock market fluctuations occur because of both objective and subjective factors. Emotions often impact the stock market. When stock prices drop, many investors trade their stock out of fear that the prices will drop further. Others may hold on to stock longer than ideal when prices go up as they hope to become it rich sooner rather than later. These actions, caused by emotions, affect stock prices. Investors know that the stock market can be highly volatile. At its extreme, the market's roller coaster-like see-saw can create fortunes or result in destitution. But what causes the market to go up or down? A combination of events and factors are typically the cause, but an isolated, large event can also be responsible. Beyond these, some factors also create spontaneous jolts in the capital market. (1) Global events: Major events throughout the world can have an impact on stock prices and market fluctuations. Events such as wars, changes in gas and oil prices and political unrest influence investors' confidence. All such developments have an impact on what investors do with their money. Changes in the value of foreign currency does also affect foreign exchange markets. This, in turn, affects stock markets in Bangladesh. (2) Increasing government's domestic debt: Government has been taking loans from the banks and investing in various sectors. Those are pre-matured ones. That is why many banks are not able to maintain their liquidity position at a comfortable level. As a result, banks' ability to provide loans is reducing. The government is also facing a dilemma. To avoid this situation, more cash is being injected to money market. It causes high inflation in the market. (3) Scarcity of foreign exchange reserve: The foreign exchange (forex) is under pressure in the current year; such reserve is already down by US$ 530 million. At the end of June, the amount of forex reserve with Bangladesh Bank (BB) was US$ 10.91 billion. In only one month period, this reserve was reduced by nearly 4.86 per cent. At the end of last July this year, the forex reserve was it was $10.38 billion. The reserve has been under further pressure since then. (4) Declining FDI & remittance flow: Foreign direct investment (FDI) also declined by 39.99 per cent while the flow of remittance was also down by 2.25 per cent so far in the current fiscal, compared to the situation in the previous fiscal. Private investment has not also been picking up to the projected level, because of excessive loans taken by the government from the banks. Presently, excessive monetary expansion is fuelling inflationary pressure in the economy. This is also effecting stock market adversely. Under such circumstances, the positive initiatives that have so far already taken by the government, Bangladesh Bank and Securities and Exchange Commission (SEC) are not bearing fruits. The liquidity problem persists in the capital market. To overcome such problems, there is a need for some immediate arrangements to create of a new fund. Maintenance of financial discipline in the money market is also imperative for ensuring a better coordination of monetary policy, keeping in tandem with the needs for stabilizing the conditions in the capital market. The writer is a stock market analyst and a professional trainee at BRAC. He can be reached at email: toufique2010@gmail.com