Investors become endangered species

You will not find a strong economy without a vibrant capital market. Every developed economy has a strong market. In fact, stock markets play a key role in turning developing economies into developed economies.  

Things, however, are different in Bangladesh. Our stock market has no correlation to our robust economic growth.

Bangladesh's economy enjoyed smooth sailing with a six percent growth on average over the last decade. It posted a record growth of 8.15 percent at the end of the outgoing decade.  

But the opposite has been the reality in the capital market. It bubbled at the beginning of the 2010s, and soon burst, destroying the aspirations of thousands of investors.

Since the crash, there have been attempts to get things back on track over the years. There were different kinds of policy support, fund injections and massive reforms at each level of the capital market as the government was eager to turn it around.

However, nothing worked.

When the market peaked in 2010, the total market capitalisation of Dhaka Stock Exchange (DSE) was more than half the country's gross domestic product (GDP). Now, the decade is drawing to an end with a GDP to market capitalisation ratio below 12.

Bangladesh's economy grew 2.5 times in the decade although the stock market was stuck at the same level. Despite adding nearly 100 new companies during this period, the DSE market capitalisation is still stuck at a vicious level of Tk3-4 lakh crore.

Thus, the gap between the economy and the market has only widened.  

The most heart-breaking part of the stock market story relates to the thousands of individual and institutional investors who are still struggling to recover from the huge losses they suffered a decade ago.

They armed themselves with a fresh effort to win the market, but to no avail, as the market continued to slide.   

The crash from 9,000 points in 2010 brought the DSE benchmark down to 3,500 points within two years. During the recovery phase, it went up to 6,300 points in 2017.

But the rest of the story is about market adversities. The gradual fall is eroding capital almost every day.

Investors now seem to have become an endangered species, losing the energy to even grieve. Market mechanisms, the government and of course the regulator have apparently failed to help them.

Over 2.3 lakh investor accounts were have been in the last six months as many investors are leaving stock market now. Central Depository Bangladesh Ltd data reveals there are now only 25.8 lakh operable beneficiary accounts in Bangladesh, which was near 32 lakh four years ago.
 
Reforms, achievements in last decade  

After the stock market crash in 2010-11, the government initiated a massive reform programme that included the regulator, stock exchanges, intermediary industries, and policies and regulations related to market activities.

The market regulator, renamed Bangladesh Securities and Exchange Commission (BSEC), is now an A category member of the International Organisation of Securities Commissions, thanks to the regulatory and infrastructural reforms making it the strongest regulator ever. 

Both the stock exchanges of the country have been de-mutualised, separating their operations and ownership. The premier bourse DSE has already secured a strategic partnership with China's Shenzhen Stock Exchange-led consortium.

Since 2010, dozens of new firms in merchant banking, asset management and some other capital market services have been allowed to come in to ensure the growth of a stronger institutional investment base. They were supposed to support market stabilisation efforts. 

Over six dozen rules and regulations were formulated or significantly amended to let the capital market adopt modern measures so that both investors and issuers can enjoy the benefits of a vibrant capital market.

Now, auditors, investment banks, issuers and exchange officials are more accountable in case of any misconduct.

The government, committed to helping the affected stock investors, also has been eager in giving the capital market a hand.

Investors are still losers

Despite all the efforts, nothing seems to have worked from the investors' point of view as the market is still struggling to survive even at a cheaper price level.

The Bangladeshi stock market has already been pronounced as one of the cheapest in the world in terms of average price to earnings ratio, which is now 11.55 for the DSE.

But still the market is fighting hard to avert the threat of going down further to reach the post-crash lowest level – 3,500 for the DSE broad index.

Following a fall of over 13 percent in 2018, DSEX, the broad index at the capital city bourse, again experienced a fall of above 18 percent to come down below 4,400 points in 2019.

Experts blame investors' waning confidence for the situation where no low seems to be enough to attract fresh capital in the market.

Foreigners have been selling stocks at the DSE for nine consecutive months and the December report is also expected to depict the same picture.

"Since the market peak of 2010, it has been a lost decade, if we calculate average investors' gains in the stock market. We are yet to recover from the losses," Md Zakir Hossain, a stock investor, told The Business Standard.   

"Except for  multinational companies and a few local firms, almost no listed company could retain a fair level of its share prices over the long period," the full-time stock investor said as he expressed his frustration at the situation.

"A record number of shares have sunk below their face value. You will barely find an institute or individual who is gaining from the stock market nowadays," he added.

Market detached from broader economy  

Another frustration with the stock market is that it has failed to establish essential links with the country's economic engine.

At present, the GDP to market capitalisation ratio in Bangladesh is the lowest in this region and even among peer countries across the globe.

In Vietnam, the ratio reflecting a capital market's size compared to the economy is above 50 percent. It is above 75 percent in India, over 45 percent in China, over 110 percent in Malaysia, over 100 percent in Japan and over 180 percent in Singapore.

"From the broader economic point of view, the biggest failure of the stock market is its inability to cater to a sufficient number of capital-hungry businesses or projects with low-cost financing alternatives, both in equity and debt format," according to capital market expert Abu Ahmed, an economics professor at the University of Dhaka.    

The gradual weakening and poor contribution of the capital market is increasing pressure on country's banking sector. On the other hand, the market is not attracting people's savings in a sustainable way. 

Not enough investment options

"We do not have enough alternative options when it comes to investment. It is still a stock-only capital market, while a prudent investor looks for debt and other tradable securities for diversification," said Abu Ahmed. 

A secondary market for trading bonds is a crying need, but policymakers over the decade have been and are still discussing it only.

In 2010, there were three corporate bonds listed with the DSE. Over the decade, the number should have been many times higher. But now there is only one corporate bond listed and different regulators are still discussing a way forward in this regard.

There are over 221 government treasury bonds listed with the DSE, but these are not traded and are treated as merely ornamental.

The market failed to list sufficient good companies with the stock exchanges that are capable of continuous value creation for shareholders and attract investors sustainably.

"We could neither bring top-performing multinational companies like Unilever and Nestle, nor profitable government-run companies or megaprojects," said Professor Abu Ahmed.

"Most of the new companies that came in the market in the last decade are not the ones the market needs and that is why nearly half of the newly-added companies are trading below their issue prices now," he explained.

The last hope

All the capital market indicators have deteriorated over the last decade. Investors, stock exchanges and intermediary industry firms are all suffering due to the market condition.

But only one thing is better now if we compare the situation with where we started at the beginning of the decade. And that is valuation level.

In 2010, the market price to earnings ratio was above 30. Now, it is below 12.

This means 12 years' average profits of the listed companies should be enough to pay back investors' capital input if they buy stocks now.

If it was in 2010, they would have to wait for 30 years. This low price to earnings ratio is a fundamental point of hope for investors.

"With lowered stock prices, the dividend yields also got higher and at a point of climax that should attract fresh investments," Shakil Rizvi, president of DSE Brokers Association, told The Business Standard.