Will there be a correction in our capital market?

Photo: Yury Kuzmin

Recently, an article in an English daily caught my eyes as it mentioned rickshaw pullers applying for a mutual fund IPO. It immediately reminded me of the famous quote by Joseph P. Kennedy Sr.: "When even shoeshine boys are giving you stock tips, it's time to sell." Mr. Kennedy, being an astute investor, did pick the signal that there might be something wrong with the New York Stock Exchange (NYSE).
An old Wall Street saying has it that when everybody is getting into the market and even the shoeshine boy is giving stock tips (or the barber/hairdresser or the taxi driver or the waiter or the bartender), it's time to sell. Mr. Kennedy was proven right by saving his millions of dollars from the crash. The question is: are we not taking our cue or is it my banker mind at its sceptic extreme? I sincerely hope this time I am proven wrong.
All are aware that Dhaka Stock Exchange (DSE) indices marked records by reaching new heights during the last 2 weeks. People whose bread and butter are involved with the capital market have welcomed the increased fund flows or liquidity to the market. However, a "deep dive" analysis is possibly long due to identify the growth drivers.
It is all very good that more and more individual investors are interested in the capital market, and more importantly the lower-income group is able to generate enough surplus cash despite the inflationary effects. But bad investment choices are only as good as never-earned income.
The capital market is the engine of growth for an economy. It performs a critical role in acting as an intermediary between savers and companies seeking additional financing for business expansion. It is encouraging to see that the capital market of Bangladesh is growing, but a repetition of the '96 scenario will throw us far away from the growth trajectory.
Have we learnt anything from that event? Unsatisfactory return will have a long-lasting effect in the mind of investors, which will take years to forget. In addition, international media's focus on Bangladesh has significantly increased in recent years. This poses an additional risk of making headlines like "unstable stock market makes the economy vulnerable" -- nothing being preempted though. We have come a long way in trying to build a strong brand for the country. Negative attention from overseas counterparties is the last thing we can afford right now.
My late-night and early-morning researches left me more confused than ever. There are firms listed in the stock exchange that have historically strong financials, stable earnings, more or less quality management and new projects at hand that are expected to drive their future growth. These firms also operate in the most lucrative industry or business segments -- power, telecommunications and the like.
Surprisingly enough, my limited study suggests that some of these stocks are not part of the upward rally. For some of them, the issue price and traded stock prices are almost same or nearing same. This could possibly be because recent issues have got the benefits of a hiked up market situation, thereby securing relatively higher issue price at the time of public floatation. However, their current status does not necessarily adequately reflect the growth stories they have to tell as well as prospects these industries promise.
On the other hand, prices of seemingly unheard-of small firms or state-owned enterprises are going up. The Price-to-Earning (P/E) ratios indicate that, theoretically, investors are either willing to wait for 30 years or so to get return on investment or they forecast double-digit earnings growth for these sometime loss-making or marginal profit making entities.
Newspapers regularly publish the state of the state-owned enterprises of which many are making losses, injuring the national balance sheet. The reasons are debatable though -- focus on government's responsibility to the public rather than driven by profit motive or in general management inefficiencies or bureaucracies -- let's not get into that. The point is: it is no secret which public sector entities are running at losses, or that only few of them are making occasional profits, if at all. Anyone reading the newspapers or even listening to television or radio news has a fair idea.
Stock price embeds, among others, public confidence in management, forecast of future earnings of the firm, governance and of course perception. But that logic does not seem to be working here. Despite talk about lack of confidence and mismanagement, perceived "no prospects," weak governance, etc., prices are going up, even for some of the state owned enterprises. Are innocent people jumping on the bandwagon again?
Access to quality and credible corporate information is still a major improvement area in the market. While a handful of institutional investors may enjoy certain benefits, nothing exists for retail investors. Riding on rumours will not get the individual investors far. Believe it or not, the market does correct itself, and it does that logically, but that is not desirable at the expense of mass people's savings.
Good governance does not have alternative, in this case I support the recent initiatives taken by the Securities and Exchange Commission (SEC) and appreciate their capacity issues. But, SEC can only do so much without appropriate support and cooperation from associated organisations or agencies, including the legal system.
Frequent change in guidelines/directives does impact public confidence in the policy-makers, but when market is changing its colour every moment, SEC has no option but to remain alert. I will reiterate the need for a national stock exchange or even demutualisation to avoid conflict of interests. I conclude with another famous quote from economist and investor John Maynard Keynes: "Markets can remain irrational a lot longer than you and I can remain solvent."

Mamun Rashid is a banker and economic analyst. The article is written in his personal capacity.