Stock investors haunted by trust deficit, liquidity crisis

Stock investors passed a very disappointing year in 2019 as the market was largely down by lack of confidence, liquidity crisis and regulatory challenges, dwarfing many measures that the government took to prop it up.

In the beginning, the market showed signs of hope on the back of political calmness aided by the peaceful national elections in December 2018, policy consistency and stable macro-economic indicators.

The benchmark index of the Dhaka Stock Exchange (DSE) surged 8.87 percent to 5,950 points within a month.

But the following 11 months were upsetting, as the DSEX gave up 1,531.18 points, or 25.73 percent, to fall to 4,418.83 at the end of the year, the lowest in three and a half years.

Turnover, an important indicator of the market, averaged Tk 900 crore daily in January but it fell to Tk 300 crore in the end.

The round-the-year liquidity crisis in the banking sector, sell-offs of foreign investors and some policy changes were largely to blame. These all created a huge confidence crisis among the investors, bringing down their investment.

In the last one year, investors’ stock value lost Tk 81,494 crore, or 19.40 percent, pulling the overall market capitalisation down to Tk 338,493 crore.

“The capital market was moribund and stock investors lost confidence because of macroeconomic situation, listing of low performing companies, and a lack of corporate governance in the listed companies,” said Mizanur Rahman, a stock market analyst.

In the last three to four months, the current account deficit widened because of the rise of government expenditure and stagnant revenue earnings, said Rahman, also a professor of the accounting and information systems department at the University of Dhaka.

 “So, the central bank had to sell a huge amount of US dollars to save the taka from exchange rate fluctuation that ultimately created liquidity pressure in the market.”

Prof Rahman said many companies were listed in the last few years but they performed poorly. Investors bought these shares at higher prices but did not get higher dividends.

There was a huge crisis of corporate governance in the banking and non-banking financial sector. As a result, non-performing loans (NPLs) rose and the capital adequacy ratio suffered, spooking investors’ confidence. The NPLs stood at Tk 116,288 crore in September, which was 11.99 percent of the total outstanding loans in banks.

Throughout the year, bank and NBFIs said they did not have enough funds to invest in the stock market. Some institutional investors reduced investment in the market. But financial institutions with funds suffered from a lack of confidence.

As of January, the excess liquidity in banks stood at Tk 67,642 crore, down 11.45 percent from that a month earlier and 13 percent year-on-year, according to data from the central bank. In February, it dropped to Tk 63,921 crore. The situation deteriorated further later.

As a result, the private sector credit growth dropped to a six-year low of 11.29 percent last fiscal year.

Foreign investors sold more shares than they bought.  Till November, their net investment stood at Tk 375 crore in the negative, which was Tk 491 crore in the negative year-on-year.

A number of foreign investors said they sold shares as they fear the local currency may devalue and macroeconomic indicators may worsen. Finance Minister AHM Mustafa Kamal, however, has ruled out the scope for any currency devaluation.

Foreign investors said rampant policy changes have affected their investment. Chief among the policy changes are regulatory measures involving Grameenphone, the largest listed company on the DSE, and the tenure extension of the closed-end mutual funds.

The changes hurt local and foreign investors in two ways: they dampened confidence and reduced the return on investment.

Grameenphone has taken a huge beating since February after Bangladesh Telecommunication Regulatory Commission (BTRC) declared it a significant market power, as the move contracted its business potential.

Throughout the year, Grameenphone was embroiled in a tussle with the BTRC over the telecom regulator’s audit claim of Tk 12,579 crore in unpaid taxes and dues. The carrier disputed the amount.

Investors saw some hope in September when the finance minister announced that the matter would be resolved within three weeks. But the tension still prevails as the issue remains unsettled. Since February, the largest listed company fell 32.67 percent.

Foreign investors have had a huge stake in Grameenphone, and they panicked because of the policy changes. This led them to sell off the stocks of the mobile phone operator, along with that of some other good companies.

The chief of the Bangladesh Securities and Exchange Commission (BSEC) has blamed the recent plunge in stocks on the ongoing tussle between Grameenphone and the telecom regulator as well as huge sell-offs by foreign investors.