AFC predicts bullish Bangladesh stock market in H2 of 2025

Global fund manager Asia Frontier Capital (AFC) predicted a bullish outlook for Bangladesh's stock market towards the second half of the next year, driven by an economic turnaround.

Although Asian frontier markets have significantly outperformed the region for a second year in a row in 2024, Bangladesh market posted another year of a negative return.

In its latest report with market forecast, Hong Kong-based AFC shows optimism because, it says, Asian frontier markets, including Bangladesh, have entered a positive economic cycle through important steps towards reforms.

After the August political changeover, the interim government in Bangladesh took a number of reform measures to be implemented across the economy, including in the capital market to boost investors' confidence.

The newly-formed Bangladesh Securities and Exchange Commission (BSEC) led by Chairman Khondoker Rashed Maqsood has been working to improve the market monitoring mechanism and to bring market manipulators to justice.

The AFC says the Bangladesh market would rebound primarily on a decline in interest rates and earnings recovery aided by macroeconomic stability in the coming year.

Current status

Global fund managers consider countries with least developed or developing economy and an underdeveloped financial market as frontier markets.

Bangladesh stock market has been ranked the worst among Asian frontier markets in 2024, while Pakistan and Sri Lanka delivered another strong year on the back of a large decline in interest rates and much improved political stability, reads a newsletter prepared by the AFC for investors.

Pakistan and Sri Lanka are already in a position to see a continued stock market rally in 2025, with their forecast of large interest rate cuts.

Among the Asian frontier stock markets, Pakistan is the best performer with an 88.6 percent return in 2024; the KSE-100 Index is the second-best performing market globally, followed by Sri Lanka ensuring a 52 per cent return this year, and Iraq 43.1 per cent. Those markets are well ahead of most Asian emerging markets too.

The Asia Frontier Capital is a pioneering fund management company that specializes in investing in high-growth Asian frontier economies by managing the AFC Asia Frontier Fund.

The AFC Asia Frontier Fund achieved another solid year and once again outperformed its regional peers, according to the AFC. Fund performance in 2024 was driven by Pakistan, Sri Lanka, Vietnam, Iraq, Kazakhstan, Mongolia, and Georgia.

What to expect in 2025

"After solid returns in 2023 and 2024, the AFC Asia Frontier Fund is entering 2025 on a strong footing, and given an outlook for robust earnings growth, lower interest rates, and still very attractive valuations, the prospects for fund returns remain very promising.

"We expect the economic momentum to continue in 2025 for Pakistan and Sri Lanka on the back of the declining interest rates and much improved political stability, especially in the case of Sri Lanka," reads the newsletter of the AFC.

"We also expect Bangladesh to post an economic turnaround towards the second half of 2025, which will be positive for its stock market."

Bangladesh is in a similar macroeconomic position where Pakistan and Sri Lanka were 18-24 months ago. It is taking tough measures to stabilise its economy; raising interest rates and bringing reforms linked to the International Monetary Fund (IMF) programme are crucial among those.

However, in the case of both Pakistan and Sri Lanka, stock markets have started reacting positively in anticipation of lower interest rates as macroeconomic indicators, such as inflation, current account, and foreign currency reserves have become more stable and begun to improve.

"We believe the same trend might play out in Bangladesh towards the second half of 2025," says the AFC, forecasting that a cooling of inflation would give room to the central bank to begin "a monetary easing cycle at some point".

"With valuation multiples of blue-chip companies trading at a large discount to their historical average, we think Bangladeshi equities could see a large re-rating similar to what Pakistan and Sri Lanka saw in 2023 as their macroeconomic indicators improved."

The Bangladesh market posted a negative return of more than 24 per cent for the period of December 29, 2023 to December 16, this year, mostly because of faulty market mechanisms [Floor price] and political uncertainties.

The benchmark index of the prime bourse plunged 17 per cent year-on-year to 5,224 on Tuesday.

The AFC noted that since Donald Trump has been elected as the next president of the United States, there is a cloud of uncertainties over countries heavily dependent on global trade and, more specifically, on exports to the US.

However, South Asian frontier countries, such as Bangladesh, Pakistan, and Sri Lanka, as well as Central Asian nations are not heavily exposed to global trade or exports to propel their economic growth.

"These countries generate most of their growth from the domestic market and their economies are more driven by domestic factors rather than US trade policies," says the AFC.

Furthermore, Bangladesh, Pakistan, and Sri Lanka are at different stages of a domestic-focused macroeconomic recovery linked to ongoing reforms and improvement in economic indicators, including inflation, interest rates, and GDP growth that are not correlated to what is happening economically or politically in the US.

In other words, Bangladesh, Pakistan, and Sri Lanka have the potential to offer uncorrelated returns in 2025 even if global trade tensions intensify.

The AFC Asia Frontier Fund has a healthy weight of 9.7 per cent to Bangladesh and will look to increase it in 2025, according to the newsletter.

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