Some people are raising eyebrows over so-called surge in stock prices. But this is a misplaced notion which is held by people who are not with the market and only occasionally take interest in stock market issues. These people keep a careful distance from stock market investment. No market insider or real investor yet feel any heat in the stock market. They see the market as usual, only moving a little forward with apparent good results in other sectors of the economy. By any standard, Bangladesh's stock market is not even near a point of reaching an overheated position.
A surging stock market has some basic features which Bangladesh's market does not possess at this moment. Only a rising trend in turnover or volume of transaction does not say anything par se about a surging market unless the same is accompanied by a surging price index and both the surges last from a few weeks to a few months. Did anything new happen there with the market that saw surge recently in the trading volume? We see nothing new, but still the trade volume is going up. But this snail's pace of surge in trade volume is quite normal when we see the other macroeconomic movements in the economy, including the rates of interest. In the last few months, market interest rates on term deposits are continuously going down, which may be acting as a factor in the slow rise of stock prices. People are generally withdrawing their savings from the banks' term deposits and looking for new options for competitive returns.
May be, a percentage of the discouraged term depositors is now turning to stock investment in the hope of a better return. Do the stock investments offer better returns to the investors? A close look reveals, yes they do. In some cases these investments offer a few more times of returns than deposit rates in banks when returns are measured in terms of yield rates. But most of the term depositors refused to see the option in the stock market because they were too scared of stock investment or they were not told by anyone clearly that the stock market was offering much more a better return. In every economy, investors remain segmented investment-wise. Hardly they cross over to other domains with their investment plans.
In Bangladesh, investors in land hardly cross over to stock investment; even investors in government saving investments will hold on to the ground, no matter how less those instruments are offering them. But a little percentage of term depositors as well as government saving certificate purchasers try to cross over to the stock market when they see all the frustrating conditions in those two areas. May be, in recent times, some people who were with banks and savings certificate investments are moving to stock investment.
In the last few years, supply of stocks went up substantially both from sale of IPOs (initial public offerings) and sponsors' stocks. But the demand did not go up in the same fashion. The result was the prolonged slump in stock prices over the last few years. Many analysts called the condition as a bearish one offering no hope.
When capital outflow overtakes the same inflow the result would surely be a price slump despite what exactly had happened in the stock market over the last few years. Many people called it no-confidence of investors. The market moved a little back and forth in the last few years, offering some scopes of capital gain for investors. Most of the naïve investors who lost money in the too-hot-a- market of 2010 left the market over the last few years. Those who were with the market and are still with it are the investors determined to remain with it come what may. In our calculation, they are overall gainers, or at least, they lost less than the investors who left the market altogether.
A stock market with an informed investing community has less of possibility of going beyond a point on the index scale when a crash becomes inevitable. The present movement both in turnover and price indices is quite normal. Given the present price-earnings ratio (p/e ratio) below 16, the market cannot be said to be proceeding fast to a point of overheating. In the recent months, foreign portfolio investors were found to be active.
This is a good sign for the market. But we should keep in mind some limiting factors about the Dhaka market. The market is not supplied with good stocks. Corporate governance in the listed companies is poor. The financial reporting from the auditors is not trustworthy. Sponsors of the companies take advantage of the burgeoning market disproportionately by selling their stock holdings.
The writer is a Professor of Economics at the University of Dhaka.
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