The Dhaka Stock Exchange (DSE) has more listed companies than emerging markets like Russia, Mexico or Egypt, or the Gulf Cooperation Council (GCC) markets like Saudi Arabia, UAE and Kuwait. It is at par with Brazil, another emerging market.
Let us look specifically at the Top-200 listed companies by market cap. Large companies have better access to resources, technology and talent, and are better proxies for market performance. If one combines the Bloomberg data of the largest 200 companies as per market cap, the average Return on Equity (ROE) in 2016 placed the DSE amongst the Top-8 in a sample of 27 prominent emerging/frontier markets. More than 50 per cent of its large companies delivered a positive growth in profits, in terms of five-year compound annual growth rate (CAGR) from 2012 to 2016. It was one of the only six markets out of the sample of 27 that achieved this. Last, it was one of the only eight markets from this sample in which more than 90 per cent companies were profitable in 2016. All these indicate its breadth and buoyancy in performance. But many globally would be unaware, hence only a dozen portfolio funds had over 90 per cent allocation of their corpus to Bangladesh as of early-2017, while Indonesia and South Africa had 50 each and Thailand and Turkey had close to 200 each.
But at the same time, data also helps quantify the areas for improvement. If one breaks-up ROE as per DuPont method, then the main accretion to DSE's ROE was due to leverage (average asset/equity). Reaching optimal leverage is good to maximise growth, but DSE was higher than the sample's average. For company, it had Nigeria, Turkey, Morocco and China, apart from developed markets like UK, Canada, Germany and Israel. It ranked amongst the least in productivity (average revenue/assets), showing that the sweating of its assets is inadequate. For company, it again had Nigeria and Morocco, apart from all the GCC markets. Its South Asian neighbours like Pakistan, Sri Lanka and India saw better productivity, as did the East African markets like Kenya and Tanzania. International Labour Organisation (ILO) data show that the growth in Bangladesh's labour productivity in the five-year period from 2012 to 2016 was reasonable. This means its companies have other assets on their books dragging productivity. They need to reduce such non-core assets.
There is a significant divergence between DSE's listed economy and real economy. The ratio of the market cap of its Top-200 companies to gross domestic product (GDP) was one of the lowest, along with Sri Lanka, Vietnam, Egypt, Tanzania and Turkey. It ranked amongst the lowest even in the revenue of its Top-200 companies to GDP. At the same time, the trading velocity in Bangladesh is reasonably high, in line with China and India. Both those countries have seen a high churn-rate from speculative investors driving volumes. If one combines Bangladesh's low market cap/GDP with its high velocity, there seems a high proportion of churn-mentality there as well. This is counter-productive for deepening long-term interest in the equity markets, since umpteen studies have shown only long-term investors make money. Eventual losses from speculation lead to client attrition, putting opex pressure for new client-addition. Pushing more institutional investment, both domestic and foreign, is imperative. India has itself seen significant asset accretion to domestic mutual fund assets recently, apart from continued interest from foreign institutional investors.
If one looks at profit concentration, the contribution of the three largest sectors to the profit-pool of Top-200 companies was 68 per cent in Bangladesh in 2016. Most Asian peers were less concentrated. It was below 70 per cent in Indonesia and below 60 per cent in India and Thailand. A higher concentration possibly indicates the impact on the profit-pie due to increased focus on a few sectors of competitive advantage. Interestingly, while telecom is one of its largest sectors, only one stock dominates it. So there is a company-level concentration also in certain sectors. There is a need to grow the profits of other sectors so that any risk to its large sectors does not derail overall market performance. This also means closing the gap between its real economy and listed economy. For instance, in the discretionary sector, the average size of profits of its textile companies, its area of competitive advantage, is smaller than its market's average. Elsewhere, the average size of the area of competitive advantage is relatively higher to their market's average. To list more large, profitable, yet unlisted, textile companies is an imperative. Bangladesh's gross investment averaged 30 per cent for the five years till 2016, less than the average 35-40 per cent seen in rapidly industrialising countries. Pushing this further should drive domestic demand for its materials and industrial sectors. The Bangladesh Taka (BDT) dropped more than the Sri Lankan Rupee (LKR), and almost similar to the Pakistani Rupee (PKR) last year. This makes it competitive in export of common products like food and fisheries, apart from textiles and materials like cement. Another area is to boost the services sector, a key employer of educated workforce. This sector was ~56 per cent of its GDP vs. 60-70 per cent seen in the larger emerging economies. Consumption remains a driver of economic growth. In comparison to countries with a similar per-capita, say Kenya, Cambodia, Ghana and Pakistan, Bangladesh's share of consumption is far less. This offers headroom for growth.
Last, are Bangladesh's large companies investing in size? It was amongst the smaller markets in our sample, as per the average profit of its Top-200 companies. The average Chinese company was 158X larger, India 25X, Thailand 11X, Colombia 10X, Philippines 7X, Indonesia 9X, Pakistan 3X and Kenya 2X. Bangladesh's average profit size was far less than Chile, Colombia, Pakistan or South Africa, though it had a similar GDP as them. Are its large companies investing to scale up? Their combined equity grew 12 per cent CAGR for the 5-years till 2016, far higher than their profit growth. This indicates infusion of fresh equity. However, the leverage remained flat in this period which is acceptable as it is on the higher side. Nevertheless, its revenue growth was far higher than its profit growth since the last 5-years, possibly indicating a higher cost-base due to capex eroding near-term profitability. That is a positive.
At the end, creating more buoyancy in investor demand is an imperative, both from foreign and domestic institutions. Retail follows them. So while DSE has seen successes, there are a few challenges too. Addressing them would help sustain the long-term investor interest which a high-potential market like Bangladesh deserves.
Sourajit Aiyer is an author, guest-lecturer and corporate executive, based in Mumbai, India.