Asia Frontier Capital sees green shoots in Bangladesh stock market, said its fund manager

The lucrative prices of well-managed company shares, a stabilising economy, and expectations of political stability together are showing Hong Kong-based Asia Frontier Capital (AFC) green shoots in the Bangladesh stock market, said its fund manager Ruchir Desai.

"I feel the economy, as well as the stock market here, has already bottomed out," the chartered financial analyst told The Business Standard in an interview during his first Dhaka visit since 2019.

Bangladesh is in a situation similar to where Sri Lanka and Pakistan were 18-24 months ago, he said, citing a crisis that drove up the dollar price, inflation, and interest rates, followed by tough measures that later reversed these trends, fuelling stock prices.

In November 2022, four months after Sri Lanka's political changeover, he visited the country when the average price-to-earnings (P/E) ratio of its stock market had dropped to a historic low of 4, down from the usual 7–8.

In the first half of 2023, AFC increased its investment in Lankan stocks, leading to a 40% market rally that year, followed by another 65% surge in 2024. 

Similarly, at the peak of Pakistan's inflationary cycle and political crisis in mid-2023, AFC invested more in Pakistani stocks and is now enjoying the rally.

His fund, which has been invested in some Bangladeshi stocks since 2013, is now planning to increase its investments here.

According to the local brokerage industry, foreign portfolio investors' total holdings in Dhaka and Chattogram stocks have dropped by two-thirds to an estimated $1.2 billion over the past six years.

Before the pandemic, strong macroeconomic indicators, favourable demographics, and growing companies attracted many foreign fund managers like Ruchir Desai to visit Bangladesh annually. 

However, the 2020 market shutdown during the lockdown, the imposition of floor prices twice, and various arbitrary regulations eroded investor confidence.

Additionally, the Ukraine war triggered foreign currency shortages, inflation, and interest rate challenges, which he believes are now stabilising after hitting their peak, thanks to tough measures under the IMF loan programme.

In recent months, Ruchir Desai observed that Bangladesh's overall market P/E ratio has declined to around 9.5, down from 16–17 six to seven years ago. Many stocks remain undervalued despite earnings growth.

"There is pessimism among investors about Bangladesh, with a negative outlook for the economy and political situation. I don't fully agree with those views," he said.

The taka has depreciated significantly, but with inflation dropping back to single digits and interest rates starting to decline, exports are recovering rapidly alongside strong remittance growth. He observes that Bangladesh has also achieved a current account surplus.

"On the political front, we are seeing relative stability compared to six months ago. So, the overall outlook should improve incrementally for Bangladesh. Therefore, I see opportunities in lucrative Bangladeshi stocks."

His fund invests in blue-chip companies in frontier markets such as Bangladesh, Pakistan, Sri Lanka, Vietnam, Kazakhstan, Uzbekistan, Mongolia, and Iraq.

Around 10% of the fund is invested in Bangladesh, with room to increase this to 20%.

"We don't expect all the positive changes to happen within 1-3 months; improvements will occur incrementally."

In six to nine months, inflation is expected to remain at a high to mid-single-digit level, and the taka should not depreciate as sharply as it has in recent years, he said, adding that a depreciation of around 5% is acceptable for an emerging economy like Bangladesh, especially as foreign fund managers expect much higher returns from undervalued blue-chip stocks.

"We buy and hold for the long term; we have been holding some companies since the inception of our fund."

Square Pharmaceuticals, Beximco Pharmaceuticals, BRAC Bank, British American Tobacco, Bangladesh, and Marico Bangladesh are the stocks in which AFC has larger investments.

Last week, Ruchir Desai met officials from around 13-14 listed companies to learn about their outlook and has added City Bank, Walton, and Grameenphone to his watchlist.

He expects the ongoing economic correction programmes to strengthen the foundation of Bangladesh's economy, potentially boosting GDP growth back to the previous 6-7% level in a few years.

"The numbers speak for themselves," he said, elaborating on his positive expectations.

However, investors' confidence in Bangladesh has been severely affected in the past couple of years by arbitrary regulations.

"Regulators should obviously build confidence by ensuring consistency in regulations, avoiding measures like floor prices, and refraining from arbitrary rule changes," said Ruchir Desai.

"You need to build confidence through proper regulations, streamlined processes, and a regulatory body that can be trusted-one staffed with people capable of making the right decisions," he added.

"Every country has its strengths and weaknesses. Bangladesh just needs to keep things simple instead of reinventing the wheel," he said, emphasising the need for strong regulatory oversight in the banking sector.

Long-term foreign investors seek sustained economic and political stability, as well as a stock exchange with enough good companies that have sufficient buyers and sellers, said the fund manager, who intends to resume his regular annual visits to Bangladesh.