7 days ago

Outflow of overseas funds continues as asset value erodes

"Why would foreign investors invest in a stock market where the exit is so restricted?"

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Foreign stakes in leading companies have continued falling as overseas investors have dumped their holdings since the removal of floor price in January mainly due to the sharp devaluation of the local currency against the dollar.

The country's net foreign portfolio investment stood at $89 million in the negative for the nine months through March this year, compared to $45 million in the negative for the same period a year ago, according to Bangladesh Bank data.

Foreign investors witnessed a decline in value of their assets when the taka became cheaper. The forecast that the local currency would lose its value further prompted them to exit the market.

"The value of their assets fell even if the share prices remained unchanged," said Akramul Alam, head of research at Royal Capital.

For example, if a foreign investor invested $1 or Tk 90 in a stock two years back, he/she has already seen a 30 per cent reduction in the value of the asset since the exchange rate has risen to Tk 117.

The taka has lost its value by more than 38 per cent against the dollar since the start of the Russia-Ukraine war in February 2022. Forex reserves almost halved during the time.

The 18-month-long floor-price trap is another major driver of the decline in foreign stakes in local companies.

The absence of price discovery of a large number of stocks for so long acted as a catalyst for the quick outflow of overseas funds, said market experts.

The prime index hovered around 6,300 points for nearly one and a half years until January this year, thanks to the securities regulator's bar on trade in shares at prices lower than the floor price set for every stock.

After the withdrawal of the price restriction, the Dhaka bourse lost more than 12 per cent or 772 points to 5,564 by Monday. During the time, foreign investors sought to get rid of their holdings that had remained stuck on the floor for long.

According to Md Sajedul Islam, managing director of Shyamol Equity Management, the imposition of floor price dented the confidence of foreign investors.

"As soon as the floor price was lifted, they rushed to protect their investments from further erosion," said Mr Islam.

Foreign shareholding in Grameenphone, the largest stock in terms of market capitalisation, was 2.13 per cent in January this year, which fell to 1.06 per cent by June this year.

BAT Bangladesh, the third largest stock, experienced a similar trend. Its foreign stake was reduced from 6.39 per cent in January to 4.29 per cent in June.

DBH Finance saw the highest erosion as foreigners' stake was 17.02 per cent in January this year, which plunged to 7.99 per cent in June, followed by Singer Bangladesh, whose foreign holdings declined to 1.47 per cent from 4.52 per cent during the time.

Mr Islam, however, expressed the hope that the selling pressure from foreign investors is likely to ease in the coming months as they have already sold a large portion of their holdings.

When it comes to investing in stocks in Bangladesh, foreigners are mostly interested in multinational companies. The companies are well governed and have successfully secured a profit growth even in adverse business environments.

But a consistent business performance seems to have not been enough to make foreign investors stay with the multinational companies when faith is at stake in the market and the policies that govern it.

Due to the huge sell-off, the stock prices of blue chips and well-performing companies dropped, accelerating the index fall.

In such a context, BAT Bangladesh endured 34 per cent price erosion, highest among listed multinational companies, to Tk 334.8 per share on the Dhaka Stock Exchange since the floor price removal.

BAT declared a 100 per cent cash dividend for 2023, lowest in more than a decade, which represented only 30 per cent of the profit gained in the year. The dollar crisis is a major reason behind the low cash dividends as repatriation of the return on investment has become challenging.

Frequent policy changes also discourage foreigners from keeping funds in Bangladesh's stock market, said a leading broker who manages foreign portfolios.

Giving an example, the broker, who wished to remain anonymous, said that after the removal of floor price in January, the regulator reduced the lower circuit breaker from 10 per cent to 3 per cent to stop the indices from falling.

"Why would foreign investors invest in a stock market where the exit is so restricted?" he said.

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