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Equity market needs a "rethink" for investors to return

Farhan Fardaus and Babul Barman | June 11, 2024 00:00:00

Investors have turned their back on the stock market.

It is not just tax measures in the proposed budget or macroeconomic indicators, such as high inflation and depletion of foreign exchange reserves, which are driving out money from stocks.

A lack of confidence in the market, which deepened for repeated interference of the securities regulator and for its failure to keep bad elements from overpowering itself, has finally begun inflicting wounds that no one can do anything about.

Since the withdrawal of the floor price in January this year, large-cap stocks have witnessed persistent price erosion with total disregard to the companies' financial performance.

That resulted in the prime index of the Dhaka Stock Exchange (DSE) plunging to a 39-month low of 5,105 points on Monday. The market-value shed Tk 1.54 trillion since January when the regulator finally gave up its control over stock prices.

Blue chips lost more than the broad index. The blue chip index fell to a 41-month low of 1,811 points on Monday.

Investors' message is clear - no one can or should decide on behalf of them as to how to handle assets. So, they are walking out on the equity market.

"Bangladesh market lost its credibility. The government has to rethink the stock market," said Ahsan H. Mansur, director of the Policy Research Institute of Bangladesh.

Floor price eroded investors' confidence in the market. Moreover, stocks have been subject to manipulation time and again but the regulator has not taken any exemplary action to stop the practice, Mr Mansur said.

The index has already fallen below the level seen in July 2022 when the Bangladesh Securities and Exchange Commission (BSEC) reintroduced the floor price to avert free fall of stocks.

Looking back, the measure now seems to be a futile attempt that cost investors 18 months or more.

During the time when large-cap stocks remained stuck on the floor, small-cap stocks surged on the Dhaka and Chittagong bourses, leaving wise investors baffled while making not-so-financially literate and greedy investors join the rally in the hope of quick gains.

"Non-operating companies' stocks doubled overnight [on the bourses]. Who were behind the rally? Why haven't they been punished?" questioned Mr Mansur.

General investors felt cheated when they fell victim to such artificial hikes of stock prices. They have never seen the regulator waking up to the problem.

A similar regulatory indifference has been palpable even in the cases where brokerage firms embezzled investors' money. The firms' clients are yet to get their money back.

The lax governance played a critical role in turning the market into how it appears now.

This is the backdrop to investors showing no interest in blue chip stocks that have hit rock bottom.

Grameenphone, BAT Bangladesh, Renata, United Power, and Walton have been failing to attract new investments even though the stock prices came down to a historic low.

When it comes to investing, institutional and foreign investors are mostly interested in blue chip stocks. These companies are well governed and have successfully maintained a profit growth even in adverse business environments.

Grameenphone, the largest company in consideration of the market capitalisation, plunged 28 per cent since the floor price removal to Tk 225.40 per share, the lowest in two years.

BAT Bangladesh, the third largest stock, experienced a similar trend. Its stocks tumbled 41 per cent to a historic low of Tk 232 per share, the lowest price in more than two years.

Economist Dr. Zaid Bakht said he believes the lack of governance is the main issue behind the perpetual decline of the index.

"All focus is on how to make the market turn around -- somehow. There is no attention on bringing in reforms, for example to get fundamentally strong companies listed in the market."

In fact, the stock market did not see any sustainable bull run in the last one decade because of structural problems whereas most global indices have doubled or tripled during the period.

Meanwhile, budgetary measures for FY25 have served a fresh blow to the market.

"People were expecting some stimulus for the stock market in the budget but that was not there. So, they are showing a negative reaction," said Mr Bakht.

Instead of making attempts to help the market recover, the budget proposed imposing capital gain tax on individual investors for the first time, applicable when profits exceed Tk 5 million.

"We are not against the capital gain tax, but this is not the right time," said Saiful Islam, president of the DSE Brokers Association of Bangladesh.

It just intensified negative sentiment about the market, he added.

Only seasoned investors remain in the market, "who are truly long-term investors", said Md Shakil Rizvi, director of the Dhaka Stock Exchange.

People are still going out of the market. The market will gain stability when the sell pressure will ease. And then new investments will come in, Mr Rizvi said.

According to Mr Mansur, the market's recovery is possible, but to make that happen, the regulator should punish stock manipulators to help investors regain confidence in the market.

"Good-performing stocks are now at a lucrative price level. If the taka gets strengthened and the [foreign exchange] reserves become stable, foreign investors will return.

"Without foreign investors, the market won't gain much."

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