Great exodus from stock market

Foreign funds are showing no sign of return to Bangladesh's stock market – a situation that doesn't go with the country's stable economic performance for over a decade.

In the last calendar year of 2022, foreign portfolio investors sold off higher amounts of shares in the Dhaka Stock Exchange (DSE) than they bought. The negative trend continued for the fifth consecutive year.

Moreover, foreign investors' participation in trading at the premier bourse came down to a 10-year low in the calendar year.

According to the DSE, foreigners poured Tk8,665 crore into listed scrips between 2010 and 2017, but they pulled out almost the entire money, Tk8100 crore to be exact, in the next five years, from 2018 to 2022.

Infographic: TBS

Experts blame both global and local factors which, in conjunction, have been discouraging international fund managers from trading even on the blue-chip stocks at their multi-year lows. Local analysts also find that some shares like that of Square Pharmaceuticals are selling at the cheapest ever valuation in terms of the price-to-earnings ratio.
 
The global trends

"Developed market capital flows into emerging or less matured frontier markets when Wall Street is flooded with cheap dollars. It, however, flies back when the dollar becomes costlier in the USA due to rising interest rates or in other countries because of the exchange rates," said CFA Society Bangladesh President Md Shaheen Iqbal.

Fund managers usually pour money into different markets and pull that out as part of their global strategies. So it is common that the capital markets of similar status – either they be developed, emerging or frontier ones – see similar fates, more or less.

In 2006 and 2007, Dhaka and Chattogram stocks, just before the 2007-10 bull run – attracted some foreign funds and the investors were cautious during the 2009-10 DSE bubble in the aftermath of the global financial meltdown then.

Following the DSE crash, foreign investors kept building positions on falling blue-chip stocks in 2011 and the trend continued until 2017.

Afterwards, global funds were mostly flowing out from frontier and emerging markets, of course having pauses and reverses in the middle. 

For instance, Sri Lankan stocks had a net inflow of foreign capital until the pandemic, Pakistan had a positive inflow in 2018 and in the first nine months of 2022, India was a big receiver of foreign portfolio investments in 2019 and 2021.

Bangladesh, however, did not see the reverse. Even in the global money printing spree amid the pandemic-hit years of 2020 and 2021, the country neither could attract global stock investors nor could retain enough of the existing ones.

Poor market governance spooked investors

Experts said unforeseen policy U-turns that hurt investors and unconventional restrictive measures such as lending rate caps or the floor prices in the bourses – all had their damages on the country's reputation among global fund managers already concerned about the regimented exchange rates of taka.

Foreign investors assuming a currency risk here started selling off DSE stocks in 2018 as the Bangladesh Bank kept holding the regimented foreign exchange rates – until May 2022 when taka depreciated by more than 20%, according to market analysts.

If taka falls against the greenback, foreign investors' takeaway squeezes in terms of dollar.

Policy Exchange of Bangladesh Founding Chairman M Masrur Reaz, however, believes that the currency risk was not a problem for foreign investors in Bangladesh until last year.

The Bangladesh capital market is caught in even bigger problems, he said and added, "Instead, the factors behind the capital markets' common criticisms here deterred foreigners."

The lack of confidence in market governance, policy fairness and predictability and the slow progress in market structure development and the absence of sufficient investment products are the major points behind foreigners' frustration here, pointed out Masrur Reaz.

"Despite too many reported manipulations, enough efforts to stop the irregularities and punish the wrongdoers are not visible here," he added.
 
Discouraging local factors

"Obviously, there are investable stocks selling cheap on the DSE and the CSE, but foreign investors do not seem to care. Rather, they are in an exit mood for longer than usual," said stock market expert Abu Ahmed, a former Dhaka University professor of economics.

"Some fantastic stocks are selling at their PE ratios around 10, foreign funds have been buying such stocks at even 20 PE in our peer markets and selling off our ones," he expressed frustration while talking to The Business Standard.

It means that Bangladesh is being perceived as a risky market by foreigners, said the expert.  

A European fund manager who invested in Bangladesh, wishing to remain unnamed, told TBS that global investors do not like the way the Bangladesh government treats companies like Titas Gas and Grameenphone.

State-owned Titas Gas Transmission and Distribution Company, in the early 2010s, had a fair foreign shareholding as it used to offer a stable income and dividends. Meanwhile, the energy regulator using its arbitrary power squeezed its profit margin drastically. In response, foreigners protested in their language – selling off.

Top telecom operator Grameenphone's investors have long been hurt by the tax dispute and anti-monopoly policies. When the telecom regulator barred the company's new connection sales citing poor quality of services in mid-2022, the investors translated it into an anti-investor gesture, said Professor Ahmed.

Policies designed to benefit a few

Foreign fund managers often complain that policies and regulations in the Bangladesh market barely address the interest of all kinds of investors. Instead, they come to benefit some quarters.

City of London Investment Management, a reputed international mutual fund investor, invested in several closed-end mutual funds listed on the DSE to hunt huge discounts the market was offering. The investor, like many others, was eying the fund redemption in a few years that might help them get paid at liquidation values which were significantly higher than the fund units' prices in the DSE.

The Bangladesh Securities and Exchange Commission, in an unpredicted move, allegedly served the interest of some asset managers and allowed the funds' tenure extension by another decade, depriving the investors of the opportunity for a profitable exit.

In protest, the City of London Investment Management filed a writ petition against the commission in 2019 but the best law firm failed to help the foreign investor.

The international investors' community got wary from the bad experience of the mutual fund investor.

Brac Bank, a private sector lender that pioneered SME lending on a massive scale and revolutionised financial transactions across the country through its mobile financial services venture bKash, saw its foreign shareholding declining to 33.64% at the end of 2022 from 37.88% a year ago.

The lending rate cap set by the Bangladesh Bank has been another major factor that foreign portfolio investors disliked. Moreover, the central bank's 2017 move to allow so many banks to go under control of one business family was not appreciated by them as well.   

A top-tier brokerage firm's chief executive, wishing to remain unnamed, said foreigners might have liquidated much more of their stock investments here had not the floor price restrictions made selling their shares almost impossible in the secondary market.

Foreign fund managers had their nightmares in DSE when the market went shut for more than two months during the first lockdown of 2020 as they became unable to sell any shares here to pay their clients who were asking for money.

A New York-based fund manager had to report to the US SEC almost every working day then and explain why his fund was unable to pay back investors in time.

However, the floor price on individual scrips in 2020 was not welcomed by fund managers as it became irrelevant sooner.

But the same unconventional restriction backfired in the second half of 2022 as the market did not take off from the floors set after a stunning 15-month market rally.

Whenever they had opportunities in 2022, foreigners have been selling their stocks, mostly blue-chip ones, said the stockbrokers serving a number of foreign clients.

After the 2010 crash, the turnaround of the blue-chip stocks happened because the market was allowed to trade freely, and at the right point foreigners bought the stocks heavily, said Professor Abu Ahmed, adding that it did not happen during the pandemic and Ukraine war crisis because of the restrictive measures by the regulator.
 
Is foreign capital important?

"Of course, foreign capital is important for any market which wants to contribute to economic development," said chartered financial analyst Shaheen Iqbal.

In another unconventional display, the stock regulator led a series of road-shows to promote Bangladesh's economy and its capital market in major financial cities across the world in the last two years, but foreign investors seem to have barely noticed.

Many observers believe that the unprecedented market promotion activities by the regulator itself might have backfired instead.

Professor Abu Ahmed said regulators, instead, should be busy with creating a free and fair market environment.  

Foreigners' participation in the bourses of Dhaka and Chattogram has been too low – always less than 10% of the total trading turnover and 1.78% in 2022.

Iqbal, in an interview with The Business Standard recently, said the Bangladesh capital market significantly lags behind the development pace of the economy and the market needs to head towards the status of an emerging economy, from the existing frontier market status to play its proper role.

Global investors allocate much more to emerging markets like India than the frontier markets like Bangladesh, Sri Lanka and Pakistan.

Professor Abu Ahmed said the factors that dented foreign investors' confidence in the Bangladesh capital market must be corrected as foreign investors' confidence reflects that of any rational investor alongside the markets' preparedness for fair treatment to all investors.

Mohammad Emran Hasan, CEO of Shanta Asset Management, feels that most of the foreign exodus in blue-chip shares is over and foreigners are yet to be likely to increase allocation in Bangladeshi stocks as long as they forecast taka to depreciate further.

However, as soon as the foreign selling would come to an end, a number of fundamentally strong company shares in the DSE would rally from their current depressed price levels, he said in an interview with The Business Standard a few months ago.