Narrow path to market recovery requires deep reforms, Vanguard warns

Bangladesh's capital market is standing at a critical crossroads, with a rare alignment of improving macroeconomic indicators and emerging political clarity offering a narrow but meaningful opportunity for recovery.

However, without deep and coordinated reforms, this window could quickly close, leaving the market trapped in its prolonged cycle of low liquidity, weak participation and depressed valuations, according to Vanguard Asset Management Limited.

In a research report titled "Current Situation of Bangladesh Economy and Recommendation for Capital Market Development", the asset management company, which manages three mutual funds in Bangladesh, said recent macroeconomic stabilisation, easing pressure on foreign exchange reserves and signs of political direction have created the conditions for a potential market revival. Yet, it cautioned that sentiment alone will not be enough. Restoring investor confidence will require structural changes and a rebuilding of institutional credibility.

Infographic: TBS

Vanguard Asset noted that despite improving macro fundamentals, the capital market remained under severe stress throughout 2025. In late December, the benchmark DSEX hovered between 4,880 and 4,960 points, roughly 11% below its September peak and close to the five-year low recorded earlier in the year. Valuations stayed compressed at around 9 to 10% earnings, significantly below the three-year average of 14.4%, reflecting heightened risk aversion rather than a deterioration in corporate earnings.

The underperformance becomes starker when viewed against regional peers. Pakistan's KSE-100 index surged to record highs following IMF-backed reforms, Sri Lanka's ASPI gained 42% year-on-year after debt restructuring, and India's Sensex delivered high single-digit returns. Bangladesh's lagging performance, the report said, underscores country-specific challenges such as political uncertainty, liquidity constraints and entrenched structural weaknesses.

Market depth indicators paint an equally sobering picture. Market capitalisation fell to Tk3.49 lakh crore in January 2025, while foreign ownership in multinational stocks declined sharply. Early in FY2025–26, net foreign outflows reached $66 million, eroding confidence further. Although there were brief inflows following recent political developments, Vanguard Asset said sustained foreign participation remains elusive without meaningful reform.

The report identified deep-rooted structural deficiencies as the core reason behind the market's prolonged weakness. No new initial public offerings have been listed in the past 18 months, largely due to approval timelines stretching beyond two years, far longer than in comparable regional markets. This, combined with limited tax incentives and weak disclosure standards, has left only 25 to 30 investable companies out of nearly 400 listed firms, severely restricting diversification opportunities for both local and foreign investors.

Bank financing continues to dominate corporate funding, as loans can be approved within months and require relatively limited disclosure. In contrast, capital market fundraising has almost collapsed. High interest rates and attractive returns on fixed-income instruments have diverted liquidity away from equities, while the mutual fund industry remains underdeveloped, accounting for less than 3% of total market capitalisation. Since September 2024, nearly 80,000 investors have exited the market, reinforcing a self-perpetuating cycle of low liquidity, weak participation and depressed valuations.

To break this cycle, Vanguard Asset laid out a comprehensive reform roadmap. It argued that stronger tax incentives, such as widening the corporate tax differential between listed and non-listed companies and offering tax relief on dividends, could encourage more firms to go public and redirect household savings toward equities. It also highlighted the need to accelerate IPO approvals, improve disclosure and strengthen corporate governance to rebuild trust among investors.

Regulatory efficiency and institutional strength were identified as equally critical. According to the report, enhancing the capacity and credibility of the Bangladesh Securities and Exchange Commission, improving stock exchange governance and restoring the stabilising role of state-owned institutions could significantly improve market integrity. Developing the debt market, expanding the institutional investor base and channelling long-term funds through mutual funds were also seen as essential steps toward reducing volatility and improving depth.

If these reforms are implemented consistently, Vanguard Asset believes Bangladesh's capital market could see a valuation re-rating toward historical norms, delivering meaningful upside and attracting renewed foreign interest. Coupled with political stabilisation under an elected government, the market has the potential to transition from a regional underperformer into an emerging opportunity, reclaiming its role as a key engine of long-term economic growth.