The Financial Express

Stock market: Will the upcoming budget show the light towards a better tomorrow?

| Updated: July 11, 2019 15:54:09

Evaly and Fianancial Express Evaly and Fianancial Express
Stock market: Will the upcoming budget show the light towards a better tomorrow?

Globally, stock markets are an alternative source of funds for joint stock companies. This is where small investors can invest their savings by buying shares and debentures. The stock exchange is also a bond market where organisations and the government can raise funds more easily than other sources. But in Bangladesh, the stock market is gradually turning into an arena where most small investors lose while racketeers gain.

But why is this happening? There are a number of factors behind this prevalent situation. A large number of small investors in the country do not have proper knowledge about the stock market, how it works and the fundamentals that determine the value of shares. They are easily swayed to buy or sell stocks of companies after hearing rumours or speculations.

In other countries of the world, small investors depend on professional portfolio managers. But in Bangladesh, such provisions are not available for small investors. The institutional investors have limitations from the central bank regarding investment limit. Moreover they are accountable to their stakeholders about the outcome of such investments. Naturally they are hesitant about investing too much into the stock market. Also, institutions do not have any regulatory bindings for investing in stocks.

Due to these reasons, the stock market has become a risky place. Small investors are investing at their own risk. If they lose their investment, they cannot blame anyone. Manipulators are taking full advantage of this situation as they continue to exploit the small investors. If this continues, after a while, the small investors will realise that this is not the right place to invest their hard-earned money. They will make such decisions as they are gaining very little from their investments in this market. Eventually they will move towards more secure investments like bank deposits and savings certificates.

In reality, the situation is already moving in that direction. At a recent seminar, the Stock and Exchange Commission (SEC) spokesman alleged that bank and savings certificate interest rates are responsible for the present bearish trend in the stock market. But the fact is that investment in stocks can have better yields than investments in bank interest and security certificates. There is ample scope for capital gain in the long run along with dividend income. Stock market is also a bond market. Investments are more secure in bonds. But the main problem is that as the market has failed to function properly a number of times over the past few years, investors are gradually losing their confidence in it. As a result, they are gradually withdrawing their investments from the market.

Investors' confidence in a stock market is a very important factor as it can be a reflection of the overall investment situation. Besides waning confidence of small investors, the institutional investors have also failed to play their due role in helping the stock market to recover. It is difficult for them to contribute more to the stock market as there are limitations and legal bindings like ceiling for investment in the stock market.

If the circumstances do not change, after a while, small investors will quit the market. Eventually the institutional investors will see no reason to play in the market either. If demand falls due to absence of small investors, the market will automatically become more bearish. These trends will not meet the objectives for a stock market in the economy.

The stock market is important as it acts as an alternative source of capital for public limited companies. Companies can easily raise capital through the market. So if the provision squeezes, then the growth prospects of companies will become narrower. Their only sources for capital will then be the banks and financial houses. As per demand supply theory, the greater demand for capital will increase rate of interest, which is considered an obstacle for business houses.

Stock market is also a bond market through which the government can easily raise capital for different development projects by issuing bonds. At the moment, the government arranges funds from commercial banks by taking loans. Government requirement for capital creates a pressure on the liquidity of banks. This again pushes the rate of interest upwards. Lack of funds for private sector will restrict industrial growth employment and overall development of the country.         

In a developed economy, the stock market acts as the mirror of the economic condition of the country. In Bangladesh, the scenario has been the exact opposite. But this does not mean that there is no need for a strong capital market in Bangladesh. Some economists often claim that stock markets are less significant as its contribution to gross domestic product (GDP) of the country is negligible. But they ignore the fact that if allowed to operate properly, the stock market has tremendous potential at contributing to the country's economic growth. The stock market has a multiplier effect on the economy.

At the moment, the government is planning to inject Tk 15 billion in order to stabilise the state-owned banks that are affected by classified loans. Banks' lending capacity has narrowed due to bad loans. Though it may be difficult, the government has the option to offload the shares of the state-owned banks. This can not only solve the funding problem, but also help the banks gain accountability because whenever a firm becomes publicly listed it becomes accountable to shareholders.

Sporadic initiatives by the SEC, government and the central bank have failed to revitalise the stock market in the past as manipulators are still very active in the market. A testament of this fact is how the prices of some junk shares begin to rise from time to time very abruptly. This happens even when these companies are losing concerns. But companies that regularly declare dividends of 10 to 15 per cent are often traded below their face values at the stock market.

When the market occasionally shows a bullish trend, the regulatory bodies become active. They interfere by issuing warning or initiating investigations. But when the same market faces bearish trend, they fail to take appropriate actions. They end up blaming the interest rates in banks and other factors which are beyond their control.

Besides this, tax on dividend earning is still considered very high. This is discouraging many small investors.

The institutional investors are obliged to comply with many regulations that restrict them from operating properly in the stock market.

Mutual funds that play important roles in adjusting the markets are also inactive. Same thing applies to foreign investors. The overall scenario is turning the market towards a persistent bearish mode.

A holistic approach is necessary to revitalise the market and regain the confidence of small investors. A rational tax policy with adequate incentives for both individual and institutional investors and restricting malpractices will allow the market to recover from the present situation. One hopes the upcoming budget will show the light towards a better tomorrow for the stock market.

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