Stock markets in dire straits: Can investors turn elsewhere?

Dhaka stocks finished flat on 7 July, the last trading day before Eid-ul-Azha holidays. DSEX, the key index of the Dhaka Stock Exchange (DSE), increased 0.90 points to stand at 6,368.95, after losing over 6.0 points in the previous day. The market moved between positive and negative several times before closing almost flat, meaning the market lacked clear direction.

Industry insiders then believed this was due to most of the investors being reluctant to make new investments before Eid. However, DSEX shed more than 227 points in the next seven days after the Eid vacation. It seems the broader macro economic issues such as the energy crisis, inflationary pressure and depreciating local currency had a bigger impact than eid holidays.

Stocks did open higher on Thursday, after a seven-day slump, as bargain hunters were showing up to buy some of their wanted stocks at a lucrative price but the upward movement did not last as most shares declined. Market insiders believe the rise was due to the sharp correction in the last seven days.

The market has remained depressed for the past five months and with no obvious end in sight, stakeholders are concerned. Despite repeated efforts by the authorities the stock market is not picking up steam. What is wrong with the stock market? And is too much focus given to the stock market and is it time for investors to explore newer investment opportunities?

Our lack of financial literacy may be the key to everything.

According to experts, the very nature of the stock market is such that, in the short-run, it does not always perform in line with the performance of the economy or corporate profitability. In the very long-term, security prices of course reflect the performance of the economy and profitability of the listed companies. 

Bangladesh had a massive bull-run in the stock market between 1999 through 2010. During that period the value of listed stocks appreciated by about a staggering 2,000%. 

Every bull market is almost always followed by a bear market. The longer and bigger the rise, the longer and bigger the fall.

"The massive market gains until 2010 was not entirely supported by economic growth and corporate profitably. As a result, the performance of the market in the following decade or so has been very subdued. However, the market does not seem to be overpriced anymore," said Shahidul Islam, CEO, VIPB Asset Management.

He added, "The economy is growing pretty fast. Long-term investors may expect good returns if they remain invested in high quality, well-governed companies."

According to many experts, the reason behind the stagnancy is the lack of investors in the market. The same old investors have been operating in the market for a long time and the stock market is failing to attract fresh investors. Many have voiced their concern regarding what this means for our overall economy.

Perhaps we are putting too much emphasis on a volatile market that is not always reflective of the economic trends.

"We are overly zealous about the stock market. No developing country ever got developed thanks to its stock market. After reaching a certain level of development, the stock market plays a key role," said Dr Kazi Iqbal, a Senior Research Fellow of Bangladesh Institute of Development Studies (BIDS).

He opined that there is lack of transparency from the corporates in the country. Many companies do not even want to join the stock market as they do not to bring the necessary transparency to their accounting. He does not think we can achieve full transparency in our current level of development.

According to Shahidul Islam, "The overall standard of corporate governance and financial reporting of the listed companies is relatively low in our country, compared to most of the emerging and developed markets. Minority shareholders' and investors' rights are not always protected."

Then a question arises: Is the current micro and macro-economic environment conducive for investment of any kind?

We have to take a look at the stock market. According to market operators, most investors have remained cautious in the past few days due to global fuel price hike and possible impact on the country's economy.

The gas shortage induced energy crisis and the subsequent return of power cuts have forced investors to be on their toes. Macro-economic factors including rising inflation and currency volatility have investors worried as well.

The Bangladesh Bank announced the monetary policy for FY 2022-23 on 30 June. The central bank increased the repo rate by 50 basis points, which may have adversely impacted the money flow to the capital market, believe experts.

Shahidul is of the opinion that investors can still find some good investment opportunities in the capital market. But investors always need to be cautious. They need to select intermediaries and/or instruments carefully.

But if there are other methods of investing, or a more proper way of investing in stocks why are we not exploring those? Because, there is a lack of awareness when it comes to investing in Bangladesh. Neither are we aware of our investment options nor do we have the necessary knowledge.

"There is a massive lack of financial literacy in our country. Very few people can evaluate the alternatives they have and make an educated decision, even the educated ones.

One of the biggest reasons behind is this: in our education system there is very little economics or finance especially in the Bangla medium. So, see the impact of this in our investment behaviour," said Dr Iqbal.

The fact that most investors are not really investors but traders who instead of relying on the dividend try to make a profit through trading is testament to that. Stocks are supposed to be long term investments which one holds for a long time and enjoy the dividends just like interest from savings – the only difference being the dividend varies but interest is fixed.

Studies show the more you trade stocks the more losses you make. The gap of knowledge is evident from how we treat the stock market.

As our economy is growing fast, households and institutions are building up savings. Shaidul is of the opinion that they will eventually look for different investment alternatives and learn investing by doing so.

"The regulatory authorities such as BSEC can organise awareness events that I think they have been doing diligently," he added.

Investment options are rather limited in Bangladesh. People either save their money in some form or invest in the stock market. Is there anywhere they can look to?

Iqbal believes there is another way. "If you take a look at India. Most households there invest in mutual funds. You don't have to fret too much about mutual funds. Ordinary people without thinking too much can safely invest their money with mutual funds. Rate of return of mutual funds tends to be higher than the interest rate offered by banks."

A mutual fund is a professionally managed investment fund that pools money from many investors and invests the money in securities such as equities, bonds, money market instruments etc.

But Mutual funds are not very popular in Bangladesh. Not even among the financially literate. He believes the reason behind this is the high interest rates offered by the saving certificate. Since people get a healthy interest rate simply by saving they do not look to invest.

Nasif Tanjim. Sketch: TBS