Blue-chip stocks back in dominance in equity market. Here is why

Appreciation in the market value witnessed by blue chip companies played a pivotal role in the rising turnover and return from the broad index of the premier bourse over the last one month.

The market recovery, driven by fundamentally-strong stocks, is a development in the positive direction after a prolonged bearish spell. They are usually expected to drive the market up or down for their large stakes in the market but that had hardly happened over the couple of years until May for the dominance of speculative stocks in the absence of positive catalysts.

In contrast, DSEX, the broad index of the Dhaka Stock Exchange (DSE), advanced 4.84 per cent or 226 points to 4,894 points in the month through Thursday.

Among the blue chip scrips, BRAC Bank experienced a 5.1 per cent price increase last week, adding 10.2 points to the broad index.

The other companies, which contributed to the market recovery, include British American Tobacco Bangladesh Company Ltd. (BATBC), Walton High-Tech Industries, and Square Pharmaceuticals.

According to market operators, the main driver of the price hike of blue chip stocks was to avail of tax rebate opportunity before the end of the fiscal year.

An investor, who intends to get tax rebate in a given year, would have to purchase securities by June 30 of the year, said S M Galibur Rahman, head of research and strategic planning at Shanta Securities.

"These investors usually put their money in blue chip companies. That's why the market observed a significant recovery in June," said Mr Rahman.

In fact, blue chip stocks started climbing up at the end of May. Their appreciation led to a rise of 5.09 per cent or 89 points of the DS30 index to 1,836 points in the month through Thursday.

Mr Rahman said some funds had begun shifting to the equity market following a decline in interest rates against bank deposits.

The deposit rates offered by good-performing banks have fallen below 11 per cent.

Several bankers said the average deposit rate (9.50pc) in the industry remained unchanged. But some banks, which earlier offered more than 11 per cent interest rates, have recently reduced rates amid narrowed scope of investments. They have focused on loan recovery, which is one of the reasons behind the decline in deposit rates.

Insiders said some market supportive measures including the ongoing move to avoid bank loans by entrepreneurs for long-term financing helped restore investor confidence.

A committee comprising the representatives of the central bank and the securities regulator is working to fix the terms of reference (ToR) on how to determine the modalities of meeting the need for term financing through bonds or equity.

With increased investor participation in the equity market, blue chip companies dominated the chart of top turnover leaders on the DSE.

For example, BRAC Bank, Square Pharmaceuticals, Bangladesh Shipping Corporation, and BATBC were on the chart of top 10 turnover leaders on June 4.

Investors' increased appetite in large-cap, fundamentally-strong stocks drove up overall daily turnover on the Dhaka bourse. The Dhaka exchange featured a turnover of Tk 2.35 billion on June 1, which gradually rose to Tk 5.06 billion on Thursday.

A rise in the market value of bank stocks also supported the recovery of the broad index and the surge in turnover.

Last week, the banking sector witnessed the highest appreciation of 6.3 per cent, followed by non-bank financial institutions' 4.3 per cent, mutual funds' 3.44 per cent, and general insurance sector's 2.47 per cent.

The surge in market capitalisation of the banking sector was driven by AB Bank, Islami Bank Bangladesh, and Prime Bank.

Of them, the stock price of Islami Bank escalated 33 per cent during the month to July 3.

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