2022 is expected to be much better than 2021 for the capital market

The intrinsic value of financial assets depends on two things: The future cash flows that the assets are expected to generate during their entire lifetime and the discount rates that the investors use to derive the present value of the cash flows. 

In the case of stocks, the cash flows come in the form of dividends. In the case of bonds, coupon payments and repayments of the principals by the issuers represent the cash flows.  The discount rates are investors' required rate of return for holding the assets. Investors' required rates of returns depend primarily on the opportunity costs of the money that is invested in capital market instruments. 

A market is efficient if the market prices of securities are close to their intrinsic values.  A market is inefficient if the security prices are disconnected from the intrinsic values of the assets or the economic fundamentals of the issuers of the securities. 

No market in the world is perfectly efficient. The level of market efficiency varies widely: Some markets are much more efficient than the others. Developed financial markets, where there are many sophisticated investors, are generally more efficient than underdeveloped ones where investors are relatively less knowledgeable and corporate disclosures are inadequate.  

Efficient markets serve the society better than inefficient ones.  In efficient markets, financial assets are fairly priced.  As a result, investors get reasonable risk-adjusted returns on their investments and issuers of marketable securities are able to raise capital at reasonable valuations.

The stock market of our country is still categorised as a frontier market by international investors.  Like most other frontier markets, our market does not seem to be very efficient.  In many cases, stock prices are driven more by speculations than fundamentals in our market. However, as the market gets bigger and investors become more knowledgeable, the market should gradually become more efficient.  

From that respect, the year 2021 was a bit of a disappointment for many observers.  The market was driven by the speculative tendencies of a significant number of investors. 

As mentioned in an article named 'Stocks that ruled in 2021' in The Business Standard on 18 December, 2021, some companies with questionable fundamentals were among the top performing stocks in 2021.   

We hope that from 2022 onwards the market will behave in a more matured manner and we will get a more efficient capital market that can support our country's goal of being a developed economy by 2041.

As of writing this article, as on 22 December, 2021, DSEX, the all share price index of Dhaka Stock Exchange was up by 25% year-to-date.  What will be the market return in 2022?  None can predict it, for mainly two reasons.  

First, the intrinsic value of a stock, as we discussed earlier, does not depend only on the dividend payments in a year. It depends on what the companies are expected to pay over 30, 40 or 50 years or even a longer term. The money market situation is also very important because the investors consider the opportunity cost of their money when they invest in capital market instruments. 

Second, as we discussed earlier, markets are not efficient.  Even if investors can estimate intrinsic values of securities correctly, the market prices of securities can differ widely from the intrinsic value due to many non-economic or behavioral factors. 

However, it is fair to say that we are going into 2022 with a lot of positive things happening in our country. The economic activities are gaining momentum after the pandemic-induced lock-downs and restrictions. Both exports and imports are growing fast. The demands for workers have grown in the countries that are main sources of wage-earners' remittances for Bangladesh.  

The efficiency and productivity in the country will increase significantly in 2022 as the Padma Bridge, the first metro rail and many other infrastructure projects are expected to be opened for public use during the year. Also, government expenditures on other ongoing mega projects will stimulate the economy.  

The money market is expected to remain stable. As the interest rates on bank loans have been capped at 9%, the Bangladesh Bank is expected to ensure enough liquidity in the system and try to facilitate the growth of private sector credit. Bangladesh Bank has indicated that they do not want interest rates to be too low either.  

When interest rates were too low in some months of 2021, Bangladesh bank mopped up liquidity from the system by issuing bills. They are expected to do it again in 2022 if interest rates come down drastically. 

The stock market is expected to grow in terms of size and depth as there are some initiatives to get some large companies listed. The secondary market for fixed income securities is expected to get bigger from a very small size currently.  

At present, only a few corporate bonds are listed on stock exchanges and the volume of secondary trading of fixed income securities is very small.  Some banks are issuing perpetual bonds to meet their capital adequacy requirements and those bonds are expected to get listed in 2022.  Some other corporate bonds and Sukuks are also in the process of getting listed.

There is a big push from the Ministry of Finance, Bangladesh Securities and Exchange Commission and Bangladesh Bank to ensure retail participation in the market for government bonds.  Government bonds are being listed on the stock exchanges and initiatives are underway to facilitate retail participation in government bonds through the exchanges.  These initiatives will create opportunities for general investors to invest in risk-free, government securities.     

Market participants expect that there will be a renewed focus on improving the standard of corporate governance and financial disclosures of listed companies in 2022.  Overall, 2022 is expected to be much better than 2021 for the capital market in Bangladesh.

Shahidul Islam. Illustration: TBS

Shahidul Islam is CEO, VIPB Asset Management Company Limited and Director and Past President, CFA Society Bangladesh