Although most Asian frontier stock markets delivered a robust performance this year, Bangladesh market has put up a poor show, with a negative return of 5.3 per cent for the period of December 30, 2022 to December 14, 2023.
The price movement restriction or floor price has been the biggest impediment to the market's growth as it shattered investor confidence by turning the entire market almost illiquid.
Bangladesh is far behind the frontier markets in terms of return but ahead of emerging markets -- China and Thailand.
However, Asian Frontier Capital (AFC), a pioneering fund management company based in Hong Kong, predicted a bullish outlook for the Bangladesh's stock market, driven by strong earnings recovery.
Global fund managers consider countries with a least developed or developing economy and an underdeveloped financial market as frontier markets.
Among the Asian frontier stock markets, Iraq was the best performer with 98 per cent return in 2023, followed by Sri Lanka (43%), Pakistan (30%), and Kazakhstan (29%), well ahead of most Asian emerging markets.
"2022 was the bottom for Asian frontier markets, 2023 was the year of the rebound and in our view 2024 will be "the" year of Asian frontier markets as all the important positive triggers fall into place," reads a newsletter prepared by the AFC for investors.
The 2023 best-performing frontier markets had seen imposition of high interest rates, aligned with the interest rate hikes by the US, to curb inflation. By the second half of this year, both inflation and interest rates were cut, for example in Pakistan and Sri Lanka, leading to investor exuberance in the stock market.
But Bangladesh kept a 9 per cent interest rate cap until June this year. The maximum lending rate has been moving up based on the six-month moving average rate of Treasury bills for the last six months, as the central bank considered tightening monetary policy to tame inflation.
Compared to global counterparts and regional frontier market peers, Bangladesh joined late in the game of rising rates and aligning core macro variables (i.e. exchange rate, interest rate) with the market, said Salim Afzal Shawon, head of research at BRAC EPL Stock Brokerage.
"Hence, we expect higher interest rates to continue for at least some period and then a possible reversal later. The higher rates are likely to result in a more attractive fixed-income market for local investors, and can be lucrative for international investors from low interest rate regimes (provided our currency becomes stable)," he added.
On the other hand, the AFC said, the key factors that will drive returns from stock investments in 2024 will be continued monetary easing in countries, such as Georgia, Kazakhstan, Sri Lanka, and Pakistan.
Favourable borrowing environment, significantly discounted valuations, and a greater macroeconomic stability drove overall returns in frontier markets, especially in Pakistan and Sri Lanka, until December 14 this year, it added.
Though the interest rate has been rising in Bangladesh since July, many listed companies have rebounded securing a good profit in the latter half of this year.
The AFC said it expected a strong earnings recovery in Bangladesh, Pakistan, Sri Lanka, and Vietnam in the coming year from "a low base due to the headwinds they have faced in the past 12-18 months".
"South Asian frontier markets like Bangladesh, Pakistan, and Sri Lanka will outperform in 2024 as these economies are coming out of a crisis, will see an earnings rebound, and have deeply discounted valuations," said the AFC.
Pakistan and Sri Lanka are already in a position to see a continued stock market rally in 2024, with their forecast of large interest rate cuts.
Though Bangladesh should see an earnings recovery next year, any stock market re-rating in the second half of 2024 would depend on ongoing macro adjustments peak in the first half of next year, according to the AFC.
AFC Asia Frontier Fund has had zero investment in stocks in Bangladesh this year while the floor price is in place.
The Fund usually invests in equities of companies that have their principal business activities in Bangladesh, Cambodia, Georgia, Iraq, Jordan, Kazakhstan, Kyrgyzstan, Maldives, Mongolia, Myanmar (Burma), Nepal, Pakistan, Papua New Guinea, Sri Lanka, Uzbekistan, and Vietnam.
Earlier, the AFC Frontier Fund had investments in blue-chip companies at attractive prices in Bangladesh. Top choices of the Fund are Square Pharma, Olympic Industries, Grameenphone, Brac Bank, and British American Tobacco Bangladesh.
On several occasions, the stock market regulator said the floor price would be lifted after the national election but no specific plan had been revealed about the floor price withdrawal mechanism.
In 2024, a monetary ease is expected by global central banks.
"This will help equity flow to frontier markets, and Bangladesh can expect a better investment flow if existing market bottlenecks are removed (for example floor price), and more so if large-cap good quality companies increase in the market via IPOs," said Mr Shawon.
"We expect to see earnings stability and growth in certain segments, owing to ongoing industry consolidations across sectors in a tighter environment, financial strengths benefitting in a rate rising environment, and some expected tailwinds to select industries as policies shift and changes take place".
"In our view, being at the right time and right place will become very important for bargain seekers in 2024. With changes happening, this is going to be anything but a flat year [for Bangladesh]," said Mr Shawon.
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