Every time a year goes by, people in the stock market try to cheer themselves up by saying to themselves (and others) that this must be the year of the capital market. After the bubble was burst in 2010, the raging stock market bull went into hiding in 2011 and 2012 with -36.6 and -19.7 per cent index return respectively. While the index generated a positive return in 2013 (3.3 per cent) and 2014 (14 per cent), the year 2015 ended in a negative territory with -4.8 per cent return. Considering that the country was almost in a standstill in the whole first quarter of 2015, this scribe would still argue that -4.8 per cent was hardly a disaster. But people coming to the stock market with a view to multiplying their money are predictably nauseated with another lacklustre year in stock market. As an analyst working in the capital market, here are this writer's suggestions to spur the ailing capital market of Bangladesh:
1. MORE QUALITY LISTINGS: From the investors' perspective, a bad company getting listed through IPO is better off not being listed at all. Many market leaders in different sectors are not listed. More efforts should be exerted so that these companies find strong incentives to get listed in the stock market. A raise in tax rate for the non-listed companies should be strongly considered. After the initial shock of bursting the bubble in 2010, the companies with strong fundamentals did just fine and not too many companies are trading cheap. Unless the quality of the listings significantly increases, the bull can at best limp in our stock market.
2. GETTING THINGS RIGHT WITH AMCS: Anyone with serious intention to spur our capital market must focus on the ailing mutual fund industry. Asset Management Companies (AMCs) are of paramount importance for the health of a stock market. The stock market is complex and an average person will find it difficult to analyse and forecast the future of companies he or she wants to invest in. It makes a lot of sense for an average person to invest in the stock market through a professional fund manager. Even it makes sense for many of the corporates and institutions to invest mainly through mutual funds as most do not have the skill required to professionally manage a portfolio. For example, in India, almost 50 per cent of Asset Under Management (AUM) of mutual funds are invested by banks/FIs and corporates. In countries like Brazil and South Africa, AUM of mutual funds as a percentage of GDP is around 40 per cent and 33 per cent respectively whereas in Bangladesh, the current AUM of mutual funds (both closed end and open end) is well below 1 per cent. Strong presence of AMCs can bring a lot of stability in the market as these professional fund managers are more likely to be driven by rationality and company fundamentals.
It is absolutely despairing that many AMCs in Bangladesh do not appreciate the importance of their role in the capital market. The idea of continuously extending the tenure of closed end mutual funds is downright breach of trust. If this notion continues to persist, mutual funds will find it difficult to raise money in future. It is thus time for the regulators to tighten up and put an end to this toxic culture. Moreover, we need to make our incentives right. The fund manager should be incentivised to generate a good return for the investors. The fund manager should be judged on his or her ability to outperform the market and should be given appropriate fees for his/her skill.
3. DEVELOPMENT OF BOND MARKET: In the global stage, the bond market is bigger than the equity market which is in stark contrast to our case. While the treasury bonds are listed in the DSE, they are hardly, if at all, traded in the secondary market. Our corporate bond market is also almost non-existent. The culture of bank financing even long term projects, at times with exorbitant interest rates, has rendered the corporate bond market stunted. Now all these large financings seem to be biting the banks now as the whole banking sector is teetering from the risk of default of large borrowers. For example, Bangladesh Bank's stress test on June 30, 2015 shows that if just the 3 top borrowers of each bank default, almost half of the banks will be undercapitalised. The Bangladesh Bank seems to understand the gravity of the problem and that is why, many of the large borrowers (above 5,000 mn) were given the opportunity to restructure their loans in 2015 in very lenient terms. It, of course, remains to be seen whether such leniency can alter the risk profile of these banks in future. Ideally speaking, with an active corporate bond market, the market could price the risk more appropriately without making the whole financial industry in the brink of a collapse.
4. A PLEA FOR 'ANALYST CALL': According to the Bangladesh Securities and Exchange Commission's (BSEC) Research Analysis Rules, 2013, an analyst must meet the company management before publishing his or her opinion on the company. From experience we can say that this message did not reach many of the top management of companies listed in the stock market. Throughout the world, this is a standard practice and the regulator needs to ensure that it is followed by the listed companies. More importantly, it is time for our listed companies to arrange analyst calls during their quarterly/annual earnings declaration. This, too, is a standard norm in the global investment world. At the moment, except for Grameenphone, no company arranges analyst calls. The top management of our listed companies needs to realise that such an arrangement only enhances their reputation and keeps wild speculation about the company at bay. This also helps analysts, as well as the investors, to make a more informed opinion about the company they are trying to analyse.
5. MORE REGULATORY COHERENCE NEEDED: Last but not the least, a significantly more regulatory coherence is required to have a vibrant and functioning capital market. Many listed companies are simultaneously under multiple regulatory jurisdictions. For example, a bank is regulated by the Bangladesh Bank. If the bank is listed, it is also inevitably under the supervision of the BSEC. The regulatory authority needs to solicit opinions from different stakeholders before a significant policy or regulation is changed so that no particular stakeholder has to suffer in a disproportionate manner. A wider and more comprehensive understanding of the stakeholders is expected from the regulatory authorities which was at times missing in our capital market. Â
It is true that our capital market is still in its nascent stage and we probably need more than these 5 proposed moves to start with in a bid to considerably improve the prevailing situation.
The writer is a research analyst at BRAC EPL Stock Brokerage Ltd.
hishamuddinkhan@gmail.com
Spurring the capital market
Abdullah Al-Rizwan | Published: January 10, 2016 00:00:00 | Updated: February 01, 2018 00:00:00
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