Rough ride for stock investors as uncertainty rules the roost

The biggest challenge the stock market faced in the outgoing year was floor price as the artificial mechanism made the whole market illiquid and shattered investors' confidence amid the gloomy economic trends. 

Whereas the well-performing companies suffered as they had to absorb the impacts of the coronavirus pandemic and the Ukraine war, the low-paid-up capital-based companies and junk stocks were on the bull run throughout 2022, driven largely by speculations.

But the Bangladesh Securities and Exchange Commission (BSEC) was busy keeping the key index up instead of ensuring good governance and restoring confidence in a year that saw a serious worsening in some macroeconomic indicators.

In July, the regulator set the floor price of every stock to halt the free fall of the market indices amidst global economic uncertainties that have impacted Bangladesh's economic indicators in the last several months.

The floor price was the average of the closing prices on July 28 and the preceding four days.

Last week, the BSEC lifted the floor price for 169 companies and set the circuit breaker in a way that would not allow the stock of companies to drop more than 1 per cent in a single day.

"The market performed the worst in the second half of the year due to the floor price because none dared to bring new funds amid the price intervention mechanism," said Prof Abu Ahmed, an analyst.

"Though the regulator has brought some changes last week, the impact would be less as it allows a slight drop every day and is only for small and junk companies."

The former professor of the economics department at the University of Dhaka described the floor price as a big mistake.

He questioned how a company's stock could trade higher when the economic condition deteriorated and the performances of the listed companies were bad.

"So, the market was dry for the half of the year. Now, the market is in a floor price trap and would not perform properly until the floor price is withdrawn."

Professor Ahmed suggested the BSEC lift it in phases, by allowing stocks to slide 2.5 per cent and then 5 per cent before bringing back the 10 per cent circuit breaker previously enforced.

The stocks have been on a declining trend since February when the central bank issued an order to specifies the exposure materials for non-bank financial institutions, said Md Sayadur Rahman, president of the Bangladesh Merchant Bankers Association.

According to the central bank, all listed shares, debentures, corporate bonds, mutual funds and other products at market prices shall be considered as share market investment for the NBFIs.

At the same time, the outstanding balance of loans given by the NBFIs to their subsidiaries and associated companies directly or indirectly engaged in the capital market will be considered as the stock market investment.

However, the equity investment of its subsidiary companies, long-term equity investment or venture capital and the shares of the Central Depository Bangladesh Ltd and stock exchanges would not be counted as the capital market investment.

The situation deteriorated once the war between Russia and Ukraine broke out and it impacted the economy all over the world, said Rahman.

Owing to the fallout of the war, Bangladesh has been facing one of its toughest periods in recent decades.

The foreign currency reserves fell from $45.95 billion in February to less than $33 billion recently as import bills rocketed.

Amid US dollar shortages, the taka lost its value by at least 25 per cent, while inflation hit a record 9.52 per cent in August before decelerating to some degree, hurting consumers, the poor particularly. 

The higher raw material prices at home and abroad have raised the cost of production for the listed companies. Similarly, the cost-of-living crisis hit them as consumers tightened their purse strings. This contributed to their lower earnings. 

Many investors did not have much investible funds because of higher inflation. 

The war-induced crisis even forced the government to shut power plants and enforce load-shedding amid gas shortage, impacting the production of manufacturers, listed and non-listed alike. 

Before the war erupted, the DSEX, the benchmark index of the Dhaka Stock Exchange (DSE), rose to 7,089 points in February from 6,853 points in early January.

When the floor price was brought back -- it was introduced for the first time in March 2020 for the pandemic -- the DSEX stood at 6,133. The index hovered around 6,200 points in the past five months.

"The situation did not improve as no policy support came from the government," said Rahman.

"The market would not bounce back without any policy support."

He suggested the government cut the tax on investors' dividend incomes, exclude bond and mutual funds while calculating banks' exposure to the markets, widen the corporate tax gap between listed and non-listed companies, and help intermediaries get funds so that they can invest more.

About the floor price, he said the floor price was reintroduced under a special situation though it did not contribute to the market significantly.

A stockbroker, preferring anonymity, said the real picture of the index could not be seen this year due to the floor price. "Moreover, it made the market dry."

Daily turnover, one of the indicators of the market, dropped 34 per cent year-on-year to Tk 978 crore as of December 20, DSE data showed.

It, however, slid to a 29-month low of Tk 227 crore on December 21.

"While the indices in other countries have bounced back from the war-induced fall, the stock index in Bangladesh has remained in a trap," said the stockbroker.

He warned that the lifting of the floor price might hurt the market and dent the confidence of investors. "Investors might desert the market."

Owing to the floor price, both foreign and local investors are worried about whether they would make fresh bets.

"The stock market must have some losers and some gainers and the regulator should not step in to save the losers since it is not its duty. It is the duty of investors to analyse the fundamentals of a company before investing in its stock," said the broker.

He suggested lifting the floor price in phases, starting with blue chips and then all other companies when they make their earnings disclosures.

"The volume of stock trading declined mainly for the floor price as most of the stocks' price is stuck," said Richard D' Rozario, president of the DSE Brokers Association of Bangladesh.

"Due to the floor price, the buyers are not getting their expected price, while sellers are not finding buyers."