Stocks turnaround defying monetary tightening

Infographic: TBS

Dhaka and Chattogram stocks began their recovery on Monday, despite the announcement of a contractionary monetary policy by the Bangladesh Bank.

The DSEX, the broad-based index of the Dhaka Stock Exchange (DSE), gained by 0.53% to 6,314 points in the first trading session following the unveiling of the much-feared policy.

The major index of the premier bourse fell from 6,367 on 11 June to 6,264 on 15 June before the halfway recovery on Monday.

Unlike average investors, stockbrokers and analysts were not surprised, as the stock market, considered a leading indicator of the economy, had already reacted a lot over the previous week.

A contractionary monetary environment, when interest rates rise and money flow in the economy slows down, historically tends to intimidate stock investors as it makes stocks less lucrative compared to other risk-free assets, while higher interest expenses drag down the profitability of leveraged firms.

However, the monetary policy statement announced on Sunday was hailed by market analysts, who believe it corrected the central bank's previous mistakes of artificially holding interest and foreign exchange rates.

For instance, IDLC Securities, in its monetary policy review, said, "Policies are rationalised to address economic reality."

Lending rate caps and multiple dollar rates had been creating imbalances in the economy, and the central bank's move to rationalise things might help come out of them, believed analysts.

Abul Ahsan Ahmed, head of portfolio management at IDLC Investments, told The Business Standard on Monday that a more than 100 basis point expected rise in lending rates and a slower hike in deposit rates would result in a higher financial income for cash surplus firms, while companies with a high debt burden might face a higher interest expense from July.

Also, lenders might enjoy a breathing space in terms of spread – the gap between deposit and lending rates, said analysts.

Investors have been analysing which sectors and companies may benefit from the changes brought by the monetary policy for the July-December period as they always keep looking for opportunities, said EBL Securities Research Head Rehan Kabir.

For instance, insurance stocks, following the recent sharp correction, bounced back on Monday as investors believed the monetary policy would be a boon for the cash surplus industry.

The insurance industry does not need to borrow; instead, it parks its surplus cash in various instruments in the money market and the capital market that should generate a higher return after the rate hike.

On the DSE, 19 of the top 20 gainers were insurance stocks.

The reverse repo rate, at which the central bank mops up excess liquidity from the banking system, will increase by 25 basis points to 4.5%, while the repo rate, at which the central bank provides funds to banks, will go up by 50 basis points to 6.5%.

"The market opened higher and started to recover from the recent downbeat vibe as the prevailing concerns regarding market momentum were somewhat alleviated across the trading floor," EBL Securities wrote in its daily market commentary on Monday.

"The buyers' dominance prevailed throughout the session as opportunist investors sought quick gain opportunities in the beaten-down scrips, taking advantage of the recent corrections in the market," it added.

However, market participation in the capital bourse was still sluggish, although total turnover rose by 27.5% to Tk533 crore.

The recent market volatility has drastically hurt the trading confidence of investors, said stockbrokers.

On the sectoral front, life insurance contributed the highest 23.1% of the DSE turnover, followed by the pharmaceutical and food sectors.

Unlike the bad days of the previous week, most of the sectors displayed positive returns, out of which life insurance led with a 4.9% increase in the sector's total market capitalisation, followed by general insurance, which gained by 4.4%, and cement, which gained 2.1%.

Only jute and miscellaneous sectors inched down. Of the DSE scrips, 145 advanced and 27 declined. 

During the closing bell, 223 DSE scrips were stuck on the floor while 178 were trading above the floor.

Meanwhile, CSCX, the major equity index of the Chittagong Stock Exchange (CSE), was up by 0.42% to 11141. Turnover in the port-city bourse was 5.8% lower at Tk13 crore.