Menu for 2019: Investment - between risk & risqué

Imtiaz A. Hussain | Published: January 07, 2019 21:16:51 | Updated: January 07, 2019 22:08:14

With authority and assurance, Michael S. Schwartz clarified how investors could shed their concerns and make the most out of what they do (in "Worth: The Evolution of Financial Intelligence," vol. 27, no. 4 November 2018-January 2019, 92-3). Though his anatomy of five "risks" portrays the individual investor's mindset wherever they may be, since his context was almost exclusively North Atlantic, particularly reflecting US investors, tailoring those interpretations for the far more volatile non-western world, such as Bangladesh, helps. Arguably, this non-western segment of the world is making more waves these days than the industrialised world we have come to take as if as a permanent reference point.

Those five risks relate to the market, interest rates, taxes, counterparty responses, and credit. Non-western investors automatically add a security component to that when exiting the predictable North Atlantic zone: for some non-western countries, those security risks may be low, as increasingly for India, for others climbing, as in drug-riddled Mexico, while in yet others high, as in Bangladesh (where we only have to go back to the 2014 'oborrodhs' and other unstable political developments constraining the market, investors, producers, and consumers). Before turning to this variable, understanding Schwartz's five risks merit universal attention.

Market risk is systemic. Some decisions or events may dishearten stock-owners, yet simultaneously push up bond values; or, contrariwise, they may hurt both markets. To fend off losses, Schwartz insists it would be better, always, to distribute one's investments. "Don't put all your eggs in one basket," he emphatically and unequivocally posits. A theme like this is typically raised and cultivated in rules-based associations, such as the Boys Scouts and Girl Guides clubs, not to mention the cadet colleges dotting Bangladesh. Yet, we do not seem to be extending this logical and sound advice to macro-economic planning. If we did, we would be diverting many more resources to building non-RMG sectors. True our ready-made garments (RMG) industry has been on a roll for far too long for us to want to let go when the rewards keep piling up annually, or look elsewhere, but it is this longer RMG shadow than that in any other industry in any part of the world that should worry us. Either that speaks to the depth of our poverty: too many people will work for low-wages, even if, at the aggregate level, the country is moving upwards into a middle-income bracket, indicating a sticky and stubborn social trait of keeping a subjugated class no matter what. Or the poverty-clinging population segment is too extensive to receive commensurate attention. What it does produce is an increasingly widening income-gap, itself a damper on business since market growth is a fundamental progress indicator. Like Victorian England, Bangladesh must frame policies to expand the consumer class by enfranchising more people. It would be one of the most significant "green" signals to investors in general.

Turning to interest-rates, it is important to dwell upon some presuppositions beforehand. Among these, lender credibility is foremost, that is, the financial institution imposing the interest-rates must be trusted, stemming from how long a past shadow of reliability it carries. One way to measure that is through the full performance of past loans: have they all been recovered, and recovered along predictable pathways, are the key questions one must ask. Clearly, the more the non-performance loans (NPLs), the less reliable the institution, and its more arbitrary interest-rates distracts investors. Bangladesh faces this problem constantly and has to build reliable off-setting measures to gain more investor trust. It is a tall task, still unfolding, and far from being "over."

Commercial bank interest-rates themselves depend upon central bank actions/decisions. Ultimately, governmental policy preferences at both micro and macro levels (with prices and targets, respectively), must also be monitored. In turn, harmony between the market and the government must exist, all the more so in a neo-liberal world which projects this partnership as a contest or an exchange of mutual threat: that has not been the case in the most neo-liberal country there is, the United States (note how Federal Bank decisions rattle stock, trade, and bond markets, particularly at the end of 2018 and into 2019 thus far). It has not at all been the Bangladesh case.

A third risk relates to taxation, against where presuppositions speak louder than actions. Tax reliability and predictability are just as important as how deep they go or shallow they remain. Macroeconomic studies by the government as to how private-sector enterprises might respond under various tax-schemes should be constantly conducted to both set the guidelines and keep that market-government relational harmony. Crucial to the discussion is the treatment of profits: without these as incentives, private enterprise cannot exist; but where to draw the taxation line (or limit), is the other study the government must constantly perform.

Related to the discussion would be tax-abatements, that is, how, by recycling profits into fresh investment, becomes an instrument the macroeconomic prosperity every government seeks, even if it must loosen microeconomic fundamentals for enterprise benefits.

Counterparty risks places all of the above risks on the other side, the side upon which the enterprise invests as much trust, reliability, and predictability (such as bankers, government agencies, even partners), as the credibility of the financial institutions extending the loan to invest. Without institutionalising these, investments will continue to elicit guttural connotations, much like amid the "robber-baron" era of the United States in the late 19th Century.

Ultimately credit risk becomes the fiscal statement. The borrower must, like the financial institution supplying the loan, also establish a creditable repayment track-record, and thereby reliability. Such a climate is hard to expect under high NPL circumstances.

They are even harder to expect under unpredictable security risks. This is the Bangladesh Rubicon to sustainable development: how to supply market security for the long-haul. Any decision by our government to substantially boost the non-RMG sectors would send a loud and laudable message that the long-haul is being considered, a consideration premised upon security provisions, availabilities, and guarantees. It would get the investment ball rolling in more efficient and expansive directions.

Countries like Bangladesh would have to go the entire cycle to establish their presence in the global investment firmament, then build up the reliability, trust, and predictability to be considered viable partners in the investment world. Once it does so, shifting to the thick action scene becomes easier if the original entrance formula is maintained. Do we have the spunk to go the distance? Security considerations might be currently holding the country hostage to that.

Just as Warren Buffet sees the stock-market as "a devise for transferring money from the impatient to the patient," and Schwartz interprets the market as the location where "transferring money from the uniformed to the informed" takes place, Bangladesh's case may be more of a different kind of transferring money: from the unsecured to the secured may be the way to go.

Dr. Imtiaz A. Hussain is Professor & Head of the Department of Global Studies & Governance at Independent University, Bangladesh.

Share if you like