Chained-up stock market keeps bleeding

Currently, the Dhaka Stock Exchange is experiencing a significant decrease in activity. Approximately one lakh investors have sold their entire holdings, and the presence of non-resident Bangladeshis and foreign portfolios has become insignificant, resulting in a historic low turnover.

This situation may suggest that the country's economy is on the brink of collapse, but this is not the case. According to international development partners, Bangladesh is performing well despite facing challenging times.

It is not only investors who are suffering, but also other stakeholders including stockbrokers, banks and other financial institutions that provide services such as brokerage, custody, and margin lending to investors, depository participants and clearing and settlement agencies are bearing the brunt of this stagnant market.

One possible explanation for the decline in activity is the restrictive regulatory measures put in place to prevent stock prices from falling in line with macroeconomic issues. However, these measures seem to have backfired as investors are now avoiding the spiralling down market.

Collectively, fresh investment appetite is at the bottom as those who already invested their money are struggling to come out of their losses incurred over months of a rare exit opportunity.

Due to the floor price or an extremely narrow 1% lower limit of fall a day, 337 of the 399 listed scrips at the Dhaka Stock Exchange (DSE) had no bidder on Sunday.  

Amid increasing frustration with the losses and funds stuck, only four stocks managed to stay afloat till the closing bell on Sunday and stockbrokers said investors were desperate for some free cash, instead of stocks in their accounts.

"Investors are not ready to lend an ear if it is a good time to buy or sell in the market," said a brokerage official at Motijheel.

DSEX, the broad-based index of the Dhaka Stock Exchange, falling by 0.37% to an eight-week low of 6,187 entered its fifth consecutive week of decline on Sunday.

Infographic: TBS

Investors lost over one-third of their money in a large number of stocks in the last two months.

DSE turnover dropped to less than Tk250 crore amid declining trading participation of investors which was hovering around or even higher than Tk1,000 crore even a few months ago.

On average, one of the 294 DSE brokers is not able to execute trades worth Tk1 crore even and the poor commission income from such low trades dragged most of them into a dire situation to pay the staff members regularly.

Officials of at least four brokerage firms said their salaries have become irregular since November.

A group of retail investors on Sunday, under their forum banner, took to the streets at Motijheel drawing the prime minister's attention for market support.

What brewed the crises?  

Chartered Financial Analyst Md Moniruzzaman, managing director of IDLC Investments, said the macroeconomic problems affected corporate earnings and the expected stock prices tend to come down in line with that.

Besides, the upward pressure on interest rates is working against stocks as an asset class, as large institutions find it better to park their funds at banks or treasury bonds for a risk-free higher return against an uncertain direction of stocks, he added.

For instance, while capital is eroding in the stock market, five-year treasury bonds are yielding a zero risk 8% annual return now.
Some stocks, however, are already undervalued in the market and are in buying range, he believes.

DSE board member Shakil Rizvi, managing director of brokerage firm Shakil Rizvi Stocks Ltd, said when the economy faces challenges, a company earns less or incurs losses its stock prices deserve to fall, and that is okay.

But, when investors are panicked, they barely differentiate between which company is doing well and which one is performing worse.

The market's behaviour nowadays seems to be reflecting a fear that the downturn is the end of the world and investors seem to have forgotten that some companies are trading much lower than their asset value, Rizvi went on saying.

"If you go to build the same factory like some listed companies are owning and operating, you will have to invest much more than buying the entire company from the stock market," he said.

Then what stops buyers?

"Stock market is going through a major crisis now and that is investors' confidence," said DSE Brokers Association's (DBA) former president Mostaque Ahmed Sadeque who is the managing director of brokerage firm Investment Promotion Services Ltd.

When the already invested money has been stuck due to lack of exit opportunity the market just went stagnant and the same investor feels shaky to buy stocks anymore until they find too lucrative bets, said the veteran stockbroker and investor.

Stock market expert Abu Ahmed, former professor of economics at the University of Dhaka blames the unconventional regulatory measures for not letting stock prices fall.

When prices cannot come down in line with deteriorated fundamentals of lack of demand, the stocks are perceived as overvalued by investors and their appetite declines.

Several stocks, especially which posted earnings growth in the tough period of the second half of 2022 should have attracted buyers if their prices were not stuck on the floor.

"The regulator should have left the market movement to the will of the investors, instead of not-so-well-thought restrictions," said Professor Abu Ahmed.

The floor price dilemma

In early February, Morgan Stanley Capital International (MSCI) announced a special treatment to the Bangladeshi equities citing a lack of liquidity that refers to the ease of entry and exit.

The global index provider usually ousts the particular markets from the globally followed MSCI Frontier Market Index after such alerts if the negative factors continue.

Global funds that track the MSCI indices sell off the shares ousted from the benchmarks. And that sparked fear among the investors who felt assured of a market hibernation during the hard time that the Bangladesh Securities might come up to withdraw the floor prices that should trigger another round of selloffs.

BSEC imposed the floor price on individual scrips at the end of July last year and in late December it withdrew the floor from 168 low-cap scrips. As of Sunday, 107 of them lost their market value, while investors lost one-third of their capital in a number of the stocks.

The worst part is the investors barely had exit opportunities from the falling knives as 152 of the 168 scrips had bidders on Sunday. 

BSEC Chairman Professor Shibli Rubayat-Ul-Islam on several occasions in the last two months said there is no possibility of withdrawing the restrictions all of a sudden, rather the regulator would embrace a gradual approach to come out of the restriction.
BSEC Executive Director and spokesperson Rezaul Karim told TBS on Sunday afternoon that there had been no files on the regulator's table regarding the withdrawal of floor prices.

However, the investors seem to have lost interest. 

A retail investor seeking anonymity said last week that he felt the regulatory actions were more unpredictable and unstable than the market itself. 

Around one lakh investors have emptied their investment accounts over the last one year. According to the Central Depository Bangladesh, the number of beneficiary owner accounts having securities in balance dropped by one lakh from 15.17 lakh in mid-February last year. 

The market had several temporary upswings in the middle, mainly due to some market support hopes that did not endure.