Stock market: No silver lining on the horizon

Dhaka,  Sun,  20 August 2017
Published : 18 Jun 2017, 21:26:59
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Stock market: No silver lining on the horizon

With no sops coming from the government for investors and banks staying away with their funds, the stock market is likely to remain in a moribund state for an indefinite period, writes Shamsul Huq Zahid
Finance Minister AMA Muhith in his budget speech, delivered on June 01 last, made more or less a 'mechanical' reference to the country's stock market. 

In fact, he did not say anything that deserves to be termed pro-market. Nor did he say anything that goes against the market. So, he maintained a neutral stance as far as capital market is concerned! 

The budgetary proposals such as waiver of tax for the Alternative Investment Fund (AIF), full tax exemption for the Bangladesh Securities and Exchange Commission (BSEC) for the next five years and the plan to establish a separate clearing and settlement company do not mean anything as far as wooing investors to the market is concerned. 

The stock market during the days after the presentation of budget was very much non-reactive. The indices moved up and down as usual. 

The market players and investors also preferred to be non-reactive in the days following the presentation of budget. 

So, it is quite clear that the market would continue to perform in a lackluster manner with a handful of investors playing their part in transactions. 

But the market right now needed a mild push to help it rise up to a level that it deserves, in terms of its inherent strength. 

The stock market, barring occasional artificial push generated by a section of manipulators, has remained starved of liquidity since its collapse in December 2010.  

There is enough excess liquidity with banks and investible surplus with millions of savers, big and small. The savers are finding the banks as wrong places to deposit their money, for the effective rate of return from the same is now negative. 

For them, the most attractive investment option is the government's savings tools because the return, relatively speaking, is quite healthy. Under the circumstances, funds are flowing like anything into savings tools. Though the government has a cheaper option---bank borrowing--- to bankroll the budget deficit, it is now largely dependent on the savings tools for reasons beyond fiscal considerations. 

However, even without the option to invest in high-interest bearing savings tools, people would not have put their funds in stocks since they are yet to overcome the shock of the 2010 market crash.   

To be honest, everyone wants the stock market to perform normally in keeping with its true fundamentals. That helps the market to grow steadily and gain further strength. But a section of greedy and unscrupulous people does not allow the market to behave that way and cause enough harm to the market by their manipulative activities. 

Some people do also think that it is proper for the market to move in line with the performance of the economy. They tend to seek a correlation between economic growth and the rate of return from stock market. There is, however, no certainty about such correlation. In some countries, at times, a sort of relation is found and in some other cases, there is no correlation. 

There are examples galore where stock market is very much disconnected from the real economy.  During the 2008 global financial crisis, stock markets in many countries plummeted nearly 40 to 60 per cent within days. But the economy shrank at a much lower rate. 

The US economy grew at an average rate of less than 1.5 per cent annually between 2006 and 2014.  But the S&P 500 gained at an average rate of 5.6 per cent during the same period. 

Bangladesh economy grew at over 6.0 per cent in the fiscal 2010-11 when the stock market shed more than 900 points, leading to the collapse of the market. 

The mismatch between the performance of the economy and the stock market is due to many factors. The factors include the rate of dividends, central bank policies and government's fiscal policies. These factors do greatly influence the flow of funds into the stock market. 

In the developed and mature markets, official monetary and fiscal policies do have a role in ups and downs of the equity markets. Investors are generally guided by these policies. But since most investors are generally informed ones, they do never aspire to become rich overnight. 

During the last few years, the US stock market outperformed the GDP growth. But the opposite happened in Bangladesh where the GDP growth outperformed the stock market. 

There is no denying that Bangladesh stock market lacks depth and maturity.  However, it would have acquired both the qualities by now had it not suffered two major setbacks in 1996 and 2010. Investors' confidence is thought to be the number one factor for the stock market to grow and gain strength. The two incidents of market collapse, triggered by calculated manipulation, had severely hurt that investors' confidence. Thus, restoring that confidence is the need of the hour. 

But restoration of investors' confidence can only be done through the application of right kind of policies, fiscal or otherwise. The regulatory role is also important. The securities regulator is now alive to its role. But it needs to be far more aggressive because of the damage caused to the market due to its incompetence and lack of due alertness. 

The market is virtually stagnant. That it would show some signs of vibrancy in the near future seems to be a remote possibility. During the market rally in 2009-10, banks and other financial institutions had been major providers of liquidity to the market. But despite having enough surplus liquidity they seem to be not interested to put in their money in large volume. So, with no sops coming from the government for investors and banks staying away with their funds, the stock market is likely to remain in a moribund state for an indefinite period. 

zahidmar10@gmail.com



 
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