Stable policies to lure foreign investors to present market

The current market valuation of local listed companies is attractive and policies must be stable to attract foreign investors, said a fund manager of Hong Kong-based Asia Frontier Capital (AFC).

In a recent interview with The FE, Ruchir Desai said foreign participation in the Bangladesh market had been declining in the last few years because of various obstacles, including the floor price.

The AFC started investing in the Bangladesh market in 2013 and the situation was pretty good for them until 2017 and even 2018 because of the then steady growth of GDP (gross domestic product) and the stock market that ensured good returns.

But things became tough for the company along with other foreign portfolio investors in 2020 following the outbreak of the covid pandemic, introduction of the floor price in the equity market and the lending rate cap imposed by the central bank.

After the outbreak of Covid, Bangladesh's stock market remained closed for a period of two months to May 31, 2020 unlike other markets.

The AFC fund manager said the lending rate cap and the floor price had caused damages to the money market and usual price movement in the equity market.

"You cannot restrict the market driven rates and valuation of listed securities and it was an absolute damage," said Mr. Ruchir.

On bureaucratic barriers to foreign investments, he said it takes a few months to open a trading account by a foreign investor. The barriers should be removed to help increase participation of foreign investors in the market.

Besides, the confidence of local and foreign investors would not be restored unless there are sufficient investable stocks in the market. The rules for the IPO (initial public offerings) approval process should also be reformed.

Strict compliances help restore investors' confidence. An investor would not be interested in investing in a company if it does not hold an AGM (annual general meeting) and distribute dividends timely.

"Investors should also have confidence in the regulator and the system," Ruchir said.

Bangladesh market lagging behind peers

Apart from Bangladesh, the AFC has investments in Pakistan, Sri Lanka and Vietnam among frontier markets.

The fund management company believes Pakistan and Sri Lanka's equity markets are ahead of Bangladesh's when it comes to listed securities with good fundamentals.

Mr Ruchir said the number of investable securities in Pakistan is higher than that of Bangladesh.

Pakistan is behind Bangladesh in various socioeconomic indicators but has more investable securities compared to Bangladesh.

Sri Lanka's market is small compared to Bangladesh but still has at least 20 investable stocks. Apart from addressing macroeconomic worries, the country has ensured stability in the political situation through parliamentary elections. Its tourism industry has also flourished.

Vietnam has many local companies that are performing very well, Mr Ruchir said.

"So, the listing of large-cap companies with strong fundamentals is very important here [in Bangladesh] to attract foreign portfolio investors at a large scale."

Bangladesh market to make a turnaround

Several factors will help the market recover from its peril.

The AFC's fund manager said the floor price rule that had kept the market motionless was removed.

Secondly, macroeconomic indicators started showing signs of optimism. The country's export earnings experienced a 13 per cent growth in the first half of FY25 amid political unrest, labour unrest and disruptions to productions of RMG (readymade garment) products.

Bangladesh has also witnessed a steady remittance flow over the last six months. In December last year, the remittance inflow advanced 33 percent year-on-year while the year-on-year growth in January was 3.4 per cent to Tk $2.18 billion.

Inflation is also speeding down. "As the equity market is directly related to macroeconomic situations, it's expected that positive indicators would facilitate the stability of the market.

"The valuation of the listed companies having good fundamentals are now very attractive and the market is forward looking."

The parameter that is widely considered for investments in the equity market is the valuation of securities determined by P/E (price earnings) ratios.

Apart from macroeconomic stability, the low market value of equities and devaluation of local currency have created scope for foreign portfolio investors to inject funds in Bangladesh's market.

"So, the country's market has a high chance to experience a turnaround in the second half of FY25," Mr Ruchir said.

mufazzal.fe@gmail.com