Why don’t indexes go with the flow of bearish stocks?

If you follow the Dhaka Stock Exchange (DSE), you will find that most of the shares on the premier bourse of the country ended the day either unchanged or they witnessed a drop. As a result, the indexes were supposed to fall. 

But in reality, the indices rose, and when they fell, they fell marginally. This has been the scenario for the last few months.

For instance, 122 stocks gave up, 145 remained unchanged and 41 advanced on the DSE on Thursday. Although only 13 per cent of the stocks listed on the exchange ended up in black, the benchmark DSEX Index still managed to close a single point higher.

Naturally, the question arises: why don't the indices of the market behave in line with the fluctuation of most of the securities?

Analysts squarely blame the Bangladesh Securities and Exchange Commission (BSEC) for the tricky floor price and the circuit breaker for the mismatch.

The floor price, the lowest price at which a share can be traded, was brought back on July 29 in order to prevent a freefall of stocks amidst global economic uncertainties brought on by the global crisis induced by the Russia-Ukraine war.

The floor was the average of the closing prices on July 28 of 2022 and the preceding four days.

On December 21, the stock market regulator lifted the artificial support measure for 169 companies out of nearly 400 companies listed on the DSE.  It, however, set a circuit breaker for them so they can't decline more than 1 per cent in a single day.

"As the BSEC is maintaining the floor price, stocks can't drop. Instead, they can only go up. The system is preventing the indexes from falling," said Abu Ahmed, an analyst.

The regulator has removed the floor price for some companies and they are allowed to fall only 1 per cent a day. But the market capitalisation of this group of issues is low, he said.

The slow drop of the low paid-up capital-based stocks can't bring down the index significantly. So, when some companies go up, the indexes close in positive territory, said Ahmed, a former professor of economics at the University of Dhaka.

Mohammad Musa, a professor of the business administration department at the United International University, also thinks that the floor price is the main factor.

"Institutional investors are not investing since they will face problems in offloading shares if the floor price remains in place," he said.

Earlier this month, Mohammad Rezaul Karim, a spokesperson of the BSEC, said until the market situation improved, the commission would not withdraw the floor price completely.

As the low paid-up and capital-based companies are only permitted to slip and that's also to a small extent, the index is not going down, said Prof Musa.

"But most of these stocks are only making the upward and downward swing because of speculation."

A top official of a brokerage firm says the present index does not depict the real sufferings of investors and the market intermediaries.

"Most of the investors' funds have been stuck since they have bought the shares at higher prices."

He said there is no floor price in any part of the world and the commission should not keep the market overvalued artificially.

The broker thinks that since the economy is facing a challenging situation, the market is supposed to fall.

In fact, the economy has been under serious strain for the past several months, largely owing to the volatility in the foreign exchange market stemming from the decline of the country's forex reserves.

The reserves have dipped because of the higher import payments against lower incomes in the form of export earnings and remittance receipts.

"But there is nothing to be scared about even if the market falls. This is because if the market is allowed to take its due course, some investors will still come forward and invest, paving the way for the exchanges to bounce back."