Depleting net foreign investment in stocks

Overall foreign investment in the Dhaka Stock Exchange (DSE) is equivalent to about 4.0 per cent of the total market capitalisation of about $46 billion whereas the same in case of stocks in India is over 20 per cent. The size of foreign portfolio investment does have a big psychological impact in terms of investors' confidence.

Thus, when net foreign investment in DSE has been on a downward curve for the last five consecutive months, it is something which calls for cautious analysis. It may be foreign investors are hesitant of late in injecting fresh fund during the recent months because of fears over political uncertainty in the election year. Merchant bankers said foreigners remembered the uncertain times in the aftermath of the last parliamentary election in 2014 and offloaded their portfolio as they became a bit concerned about the future of the economy. Depreciation of taka against US dollar also seems to have contributed to further sell-offs by the foreign investors.

Statistics available with the DSE show that the overseas foreign investment was Tk 250 million in the negative in April. It plummeted to Tk 2.83 billion in the negative in May, when foreign investors purchased securities worth Tk 3.41 billion and sold shares worth Tk 6.24 billion. The size of investment reached Tk 2.07 billion in the negative in June as foreign investors bought shares worth Tk 4.46 billion and sold securities worth Tk 6.53 billion. Although the pace of decline slowed in July, the foreign investors' net position was still Tk 327 million in the negative; they purchased shares worth Tk 4.12 billion and sold issues worth Tk 4.44 billion. In August, they purchased shares worth Tk 1.76 billion, but sold Tk 1.82 billion shares -- resulting in their net position negative by Tk 57 million.

CURRENCY DEPRECIATION: The net foreign investment in stocks was also negative in February this year. It was seen that the foreigners started selling off their shares as taka started losing value in consecutive months. The local currency's depreciation has made the foreigners cautious about injecting fresh fund in stocks as it eroded their profitability and the USD continued to get stronger against other currencies including taka. However, July-August saw a decline in selling pressure as the exchange rate remained almost unchanged throughout the period.

Overseas investors try to make more profit whenever local currency depreciates. It is done on purpose to offset the loss caused by the exchange rate fluctuation. For instance, if an overseas investor had made a profit of Tk 80 eight months ago, s/he would have been able to take home $1.0. But at the moment, s/he will have to make a profit of Tk 84 to take home the same USD as taka has depreciated to Tk 84 from Tk 80 during the period. Bangladesh Bank statistics reveal that the current account deficit reached $9.78 billion during the July-June period of FY18 against $1.33 billion in the preceding year. Since Bangladesh's current account deficit is widening, the local currency is bound to depreciate further. And this is why, the foreigners are offloading shares to prevent erosion of profit and waiting for scopes of parking investment as the market was at the risk of a fall.

CHINESE CONSORTIUM: Against this backdrop, a Chinese consortium's recent injection of Tk 9.62 billion in exchange of DSE's one-fourth stake (equivalent to 450.94 million shares at Tk 21 each) is a welcome move. The consortium of the Shenzhen Stock Exchange and the Shanghai Stock Exchange may help develop DSE's capacity by sharing experience of the Chinese capital market and improve the surveillance and trading system to boost investors' confidence.

China has more than 11,000 qualified institutional investors. The consortium said Chinese portfolio investors have a very strong interest in Bangladesh's capital market. Therefore, a basic understanding between the stock exchanges of these two countries should be developed first to attract 'sizeable' portfolio investment side by side improving the system of the DSE as developed technology is very useful for market expansion. DSE's greater branding effort may also pay dividend.

It is obvious that the Chinese consortium has decided to join the DSE as strategic partner considering Bangladesh's economic prospects. Investors can hope that the Chinese partnership with Bangladesh's biggest bourse will contribute to taking forward the business of DSE and Bangladesh capital market into a growth path in line with the Demutualisation Act 2013. It may also be hoped that the move will assist DSE, which has 345 listed companies with a market capitalisation of around $46 billion, in its transformational journey towards becoming an international stock exchange after 64 years of its journey.

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