Investors have been wondering what has happened to the stock market what is causing erosion in the prices of their stocks in almost every trading session. They cannot put the equation of loss straight, as they do not find any good reason behind the continuous loss of stocks' values in the recent past. The cycle of going backward in the prices of stocks is understandable, but they do not find any good reason behind the continuous erosion of values of their holdings in stocks.
The daily turnover on the Dhaka Stock Exchange (DSE) has taken a nosedive falling to the region of Tk 2.5 billion from a normal turnover between Tk 4.0 billion and Tk 5.0 billion. When market goes down, the turnover also goes down and it is natural. But what puzzles the investors is that why for so long the market should be on a receding cycle. There is a sense of despair and many think that it will take a long time for the market to bounce back.
In the meantime, the investors have lost their purchasing power. Many investors are even selling stocks under duress while some are selling in the hope that they will buy the same stocks at a lower price later on. Many other investors have taken a strategy of wait and see.
Recession and depression in our stock market is not new. Investors, who remain engaged with the market for long, are used to seeing the cycles of recession, depression and then taking a turn toward the boom. But this time, they are asking each other, how can this happen when the economy is growing at a robust rate, when export volume is also going up at a good percentage and when foreign portfolio investors are also taking an increasing interest in the Dhaka market? They are correct in raising questions, but this writer thinks that they are right only partially.
Everything is not going well in the economy. The current account deficit against the external trade is going up. The surge in the export growth is not there. The trust in the banking system has taken a dive as many people are holding more money in cash than they need. The Bangladesh Bank (BB) is also pursuing an undeclared contractionary monetary policy resulting in the rise of interest rates.
The BB has recently taken a tough stance against the banks for, what it calls, excessive lending to the private sector. It has ordered the banks, irrespective of the good performing and the bad performing ones, to cut back the Advance to Deposit Ratio (ADR) to 83 per cent from that of 85 per cent. All this means, less money is available on the market for performing the transactions. This kind of policy suits when economy goes too far in terms of leveraging itself, but unfortunately the BB opted for such a policy in a very normal time.
This writer thinks that there is no harm in extending more credits to the private sector provided that the crediting bank has the capacity to bring back the money to the bank again. Penalising every bank equally for the so-called excess lending to the private sector is unjust. The result of such policy would be: the good banks will not be able to maximise the use of their resources.
Raising competitively the depositors' rates by the banks is no good for the economy as that makes the lending rate high too. Stock prices fell simply because there was a short of liquidity in the system following the recent BB orders. No merchant bank has the money to lend investors against marginable securities, neither they have the money for buying stocks in their own accounts.
The mutual fund managers already feel exhausted with their investable surplus and the retail investors are in a condition of biting their own hands. Everyone in the stock market seems to be seller, no strong buyer is seen around. The stocks are becoming cheaper in the real sense. Another factor that has contributed to the fall of the stock prices is a rumour among the investors over the delaying strategy of the regulator, Bangladesh Securities and Exchange Commission (BSEC) in according approval to proposed purchase of 25 per cent of the equity of Dhaka Stock Exchange (DSE) by a Chinese consortium as strategic investor. Decision in this regard should have been made quickly, but that did not happen for the reasons unknown.
The banks were supposed to announce the year-end incomes and dividends for the stockholders by this time. But banks, too, are taking extra time this year, following which investors find it difficult to reconcile. Some banks paid good dividends to the investors in the preceding year, but those banks, excepting one or two, could not even declare this year the date of meeting of the management boards as yet. We do not know when the other banks will start announcing the incomes and dividends for the year ended in December 2017.
Taking above issues under consideration, many investors think that the year 2018 may not be as shiny as 2017 in terms of capital gains from stock sales and receipts of dividends. Every slide has an end. Our market will have that too. But what investors apprehend is that the rebound may not be quick and even if that happens it will not be that shiny. The hard truth is that we could not yet make our capital market a suitable one t for the savings of middle class people who can invest on a long-term basis.
Abu Ahmed is Professor of Economics, University of Dhaka.
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