The pulse of the market
Mamun Rashid

What is the future of our capital market?

  • The lack of manipulation in the stock market has been a good thing 
    Photo- REUTERS

The satisfying factor of the stock market in 2016 was that we did not have to encounter any severe collapse or inexplicable “bull run.” Moreover, considering the risk-adjusted return from July 2007 to June 2016, the stock market has given us more than 200% return, which means, year-over-year growth has been more than 16% -- quite extraordinary compared to other peer countries.

It would have been even better if we could engage some new companies to join the capital market. The supply side constraint still exists. The market capital-to-GDP ratio is quite low in Bangladesh. We have not been able to bring telecommunication giants like Robi and Banglalink in this market as we don’t have conviction in the changes necessary in the rules and regulations to attract such giants. When it comes to positive reforms in the capital market in 2016, demutualisation has been the name of the game.

In 2016, one of the major issues was bringing in strategic investors to both the bourses. Bangladesh Securities and Exchange Commission (BSEC) has previously provided a timeline to the stock exchanges for this. As the prescribed time is over, without much progress, BSEC might have to extend the timeline further. Since we will be bringing in strategic investors to the stock exchanges, the valuation analysis of the exchanges should have been done properly.

As an emerging economy, Bangladesh needs foreign capital because of the technical know-how it can bring. This would automatically raise the bar

We need to be clear about the actual worth of the stock exchanges and the percentages of shares which will be offered to the strategic investors. We also need to be clear about of our own roles and responsibilities regarding the day-to-day management, automation, and success transfer. In 2016, another positive aspect has been lack of manipulation in the stock market. BSEC’s strict monitoring along with demutualisation and increased activities of international investors were the reasons behind this stability.

The portfolio investment in Bangladesh bourses has increased around 7% in 2016. The best part of portfolio investment was that it has always served the purpose of technical know-how transfer. As an emerging economy, Bangladesh needs foreign capital because of the technical know-how it can bring. This would automatically raise the bar. In addition to that, we also try to ensure that investments made would be effective and meaningful.

Some of our development partners continued to raise the issue of Financial Reporting Act (FRA), since the Financial Reporting Council has not been formed yet. We look up to the regulators to help establish an effective organogram of the Financial Reporting Council and assign the respective members in the respective places.

The government has done some impressive work such as improving the BSEC Corporate Governance Guideline, Foreign Investment guideline, and demutualisation of the bourses. Another bright side was Bangladesh Bank modifying the guidelines on the equity investment in the primary market.

Any improvement in primary market would automatically transfer to the secondary market. And on the operational aspect of it, the process of entering and leaving the market can be made easier. Apart from such factors, we must admit that there has been improvement in the process of international contracts. The procedures of cross border financing, cross border funds management, and cross border funds investment have become flexible as well.

Major hurdles in 2016

A major hurdle was the unpredictability in the market as well as lack of deep-dive research. There is no adequate data available about the performance of this sector and background research capacity has not developed yet.

Another hurdle was the lack of improvement amongst corporate organisations and those who are working in the capital market. The capital market is heavily dependent on the small investors. Unfortunately, the small investors have never been able to play a crucial role in the market development anywhere. As a result, Bangladesh has remained a quasi-frontier market and failed to become a hardcore frontier market.

Despite an impressive task carried out by our regulators, they have failed to project or establish a strong global image. I think our regulators should focus on building a strong image among investors.

Even though the chairman of BSEC has given a heads-up to the small investors multiple times regarding making any sort of investment, due to the lack of guideline and pressure, the small investors are not really paying any heed. Also, the government could not improve the capacity of the regulators even though they decided to do so. As a result, the stock market is still a gamble place for many.

Foreign fund participation

There has been an increase in foreign portfolio investment; however we did not notice any significant shift in foreign fund participation. In 2016, the curtain fell on Swiss Pro Bangladesh Fund, which was the only UCITS listed fund of Bangladesh in Luxembourg. On the secondary market, there are more than 20 foreign funds operating directly or indirectly. Most of them are frontier market based or South Asia region-based international funds.

Expectations for 2017

We want strategic investors to come to the Dhaka and Chittagong Exchanges through proper valuation of the exchanges and due diligence. We anticipate that demutualisation will work effectively. Besides, we would expect BSEC to review the licensed merchant banks and asset management companies’ activities and necessary actions to be taken for those who could not make any contribution in the market until now. This would encourage better performers. We would also like to see improvement in institutional investment and derivatives market, and would expect the introduction of the Shariah Stock Exchange. There have been discussions about Real Estate Investment Trust (REIT) and Exchange Traded Funds (ETF) as well, but we could not make any dent here. 

We could educate small investors to invest through the AMCs. This can, on one hand, protect the small investors who lack sufficient understanding of the market fundamentals, and on the other hand, make the AMCs more impactful. But to action such an idea, the AMCs need be effective, accountable, and have transparent management system in place. Trust has to be established between the small and institutional investors. Currently the mutual fund industry is trading at a very low price-to-NAV ratio, which reflects the lack of trust in the industry. A framework of accountability can significantly change this.

Evolving challenges

We should invite large corporations to participate in the stock market for transferring their technical know-how and ensure success transfer. There is no alternative to listing large issues in the market if we wish to increase the market capital-to-GDP ratio from the current level.

Although there has been a noticeable improvement on supervisory side, international engagements will act as a catalyst in making further developments and building up more capacity such as surveillance monitoring and price discovery.

 

Mamun Rashid is an economic analyst.

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