Regional markets recovered in 2023 but Bangladesh stocks were stymied by floor price

Equity-based securities worth 60 per cent of the total stock market value have remained trapped on the floor this year.

The lowest stock prices set in July last year to avert free fall of the index made the market suffer in the end, by not letting it flourish even when earnings rebounded and companies provided record dividends out of profits gained.

The regulator's fear that the market would collapse without the price-fixing mechanism led to a dysfunctional market with erosion of investors' confidence.

Many investors have left the market whenever opportunities arose, while others have become inactive without any scope of liquidating assets.

The market on the other hand could not draw in new investments.

"A major feature of a stock market is that the index fluctuates; when an index drops, some people invest," said Prof Abu Ahmed, former chairman of the economics department at the University of Dhaka.

"The market is in a floor price trap and will not perform properly until the floor is withdrawn."

Against this backdrop, Bangladesh's stock market ranked the worst performer among Asian frontier markets in 2023, while the Sri Lankan market soared to a historic high overcoming its worst economic shock in history.

Meanwhile, FTSE Russell, a subsidiary of London Stock Exchange Group (LSEG), downgraded its rating for the capital market of Bangladesh from "restricted" to "not met" last month in the efficient trading mechanism criterion due to the prevailing share price movement restriction.

"If there were no floor price, the stock market would have been into a recovery phase already," said Md Moniruzzaman, managing director & CEO of Prime Bank Securities.

"Our stock's real valuation is unknown to us due to floor price. We prevented price adjustment. As price discovery stopped, many real investors left the market," he added.

Investors shunning the market

The average daily turnover hit a four-year low to Tk 5.78 billion in 2023, which was Tk 9.60 billion last year.

Owing to the floor price, the daily turnover has plummeted and the market has lost its vibrancy, said Md Sajedul Islam, managing director of Shyamol Equity Management.

Institutional buyers have stayed aloof from the stagnant market.

Large-cap stocks, which did well in terms of earnings, has seen fewer trades, while poor-performing businesses have kept flying high on the indexes on speculations.

Desperate to encash investments, many investors resorted to sell-off of assets at a 10 per cent lower than the floor price on the block market.

Hardly any new investor entered the market while existing investors have been trying to exit the market. As many as 0.09 million beneficiary accounts have been closed this year.

Amid the liquidity squeeze in the stock market, fixed-income assets have emerged to be a better investment vehicle, especially after the interest rate hikes in the latter half of the year by the central bank.

How positive is positive net position of foreign investors

Meanwhile, the net position in foreign portfolio investments became positive this year after three consecutive years in the red.

Foreign investors consider the liquidity of a market while making investments in securities.

The buy-sell in foreign portfolios shrank in the absence of investors.

A senior official of a leading brokerage firm, wishing not to be named, says the net position is positive since fundamentally-strong companies, where foreign investors usually invest, have not been trading at floor prices.

In 2023, overseas investors bought shares worth Tk 11.59 billion, against sales worth Tk 10.51 billion on the Dhaka Stock Exchange (DSE).

In the year, the volume of transactions in foreign portfolios was Tk 21.67 billion, the lowest since 2015.

Chief Executive Officer (CEO) LankaBangla Securities Khandoker Saffat Reza said foreigners get an idea about the weighted risks of different capital markets across the globe.

"A slight rise in the buy volume indicates foreigners may take fresh positions following the normalcy in the economy after the national election," Mr. Reza said.

Foreigners sold the highest amount of securities worth Tk 103.88 billion against purchases worth Tk 64.97 billion in 2020.

In the following two years, the amounts of sales continued to be higher compared to purchase, leading to a negative net position.

Floor price drove brokers, asset managers to despair

The lower turnover has resulted in a plunge in commission income of brokerage houses. A lower return from their investments in stocks added to the financial stress.

"Market intermediaries are struggling to survive due to the low turnover," said Md Sajedul Islam of Shyamol Equity Management.

The main income source of brokerage houses is commission that they charge clients for facilitating share trading.

"A low turnover is leaving a massive dent in our income and almost all the brokerage houses are operating with losses," said Mr Islam, adding that the intermediaries reached a break-even position when daily turnover crossed Tk 6 billion.

Asset managers handling mutual funds have also seen a sharp decline in income from the MF portfolios due to floor price.

Several fund managers told the FE that they had invested in good stocks, including blue-chip stocks, which saw no significant price movements after the introduction of the floor.

How did the peers do?

While Bangladesh's stock market has continued to endure the fallout of the global economic turmoil unleashed by the Russia-Ukraine war, its peers, for example Pakistan and Sri Lanka, have experienced a rebound.

The DSE and the CSE have been stagnant for the last 18 months.

The benchmark indexes of India and Pakistan dropped during the early days of the war, which exacerbated disruptions in the global supply chain and sent commodity prices higher, but recovered by the end of this year.

India's benchmark Nifty 50 ended the year with a nearly 20 per cent surge.

Sri Lankan's stock market ended 2023 on a positive note. Its All Share Price Index escalated 25.8 per cent or 2,190 points to 10,654 in 2023.

In early 2022, Sri Lankans had power cuts and faced shortages of essential commodities. Inflation jumped 50 per cent year-on-year while political turmoil coupled with the soaring inflation took a heavy toll on the stock market.

All Share Price Index plunged 43 per cent within six months to 7,055 points by July 2022.

It then started to recover, riding on policy support, and in the next 18 months, the index gained 51 per cent or 3,600 points to 10,654.