Stock market puzzles

The indices of two stock exchanges in Dhaka and Chittagong went up 29 and 80 points respectively amidst choppy trading on last Thursday (Feb.08, 2018) one of the eventful days in Bangladesh politics. On the day former prime minister and chairperson of the Bangladesh Nationalist Party (BNP) Begum Khaleda Zia was handed five-year prison sentence in a graft case by a Dhaka court.

The trading at the Dhaka Stock Exchange (DSE) began in an upbeat mood on the day when the capital city wore a deserted look and most economic activities came to a standstill. Roadside shops and shopping mall remained closed as businesses passed the day worrying much about the political fallout of the court verdict. However, restraint demonstrated on the part of both administration and BNP has helped avert any major trouble over the court verdict until now.

But the rise in indices in both the bourses on the day when the entire nation was gripped by severe tension looked highly unusual. The stock market in any other country would have behaved differently in a similar situation. None wants the market to go down, but it can hardly escape reality.

The behaviour of the market on the day was also contrary to statements made by the Bangladesh Merchant Bankers Association (BMBA) and the DSE Brokers Association some days back when the market witnessed a steep fall. Both the associations blamed 'political rumours' over the Khaleda Zia's verdict for continuous erosion in stock prices. If the rumours had been so effective in bringing down stock prices, then the situation on the Khaleda's verdict day should have been even worse. And such a development would have been in conformity with business environment prevailing on that particular day.

Thus, one has reasons to suspect foul play on the part of some powerful quarters to show the market in an upbeat mood on February 08 last amidst thin trading. The development has again confirmed one fact that trading in Bangladesh bourses could be influenced by factors beyond the usual ones.

On many occasions in the past the market was seen behaving in the opposite to what the situation demanded. Going by the developments in the Bangladesh market one has ample reasons to believe that it has its own dynamics that are different from most others markets in the world. The DSE indices went up in the recent past also when political uncertainty had gripped the country. Such behaviour on the part of the market can no way be described as normal.

The reasons for slide in stock prices in recent weeks can be traced in overpricing of a limited number of quality stocks, some unpalatable disclosures about bank loans and state of affairs with a number of listed banks. The central bank order on the banks to bring down their capital market investment within the allowable limit also had a role in it.

The last factor has turned out to be the most difficult one for the market. Banks are left with no options other than withdrawing a part of their investment in equity market to comply with the central bank order. The truth is that banks will lift funds from the market rather unwillingly, for equity investments do still fetch a notable amount of profit for them.

Stocks belonging to banks and financial institutions occupy a substantial part of daily transactions in both the bourses. The operating profits of profits and the growing size of classified loans of the banks are not giving investors any encouraging message. So, investment option for them in the case of banks is now reduced.

Similarly, all the stocks having strong fundamentals are overpriced. Investors, most of whom are short-term ones, do not have that many options as far as investment is concerned. In such a situation marked by repeated correction followed by brief upsurge remain to be a normal phenomenon in the market. If anything exceptional does take place that would be due to manipulation, nothing else.

Moreover, yet another negative development is now in the offing. While complying with the central bank order, some banks reportedly have started withdrawing their investment from the deposit schemes of the Investment Corporation of Bangladesh (ICB), the state-owned investment entity.

The withdrawal has put the ICB in real difficulty, for the funds invested by banks in the deposit scheme is substantial and the ICB usually puts the same in equities. Now the ICB either will have to manage funds from some other sources to make payments to the banks or dispose of the stocks it holds. The disposal of such a large volume of stocks would surely create a negative impact on the market, it is feared.

Under the circumstances, the ICB has sought government intervention and requested it to ask some state agencies to put in their idle funds in the ICB deposit scheme.

If ICB is forced to dispose of stocks to meet its payment obligations to banks, the stock market might face serious problems.

Overall, Bangladesh stock market does not follow the norms that usually come into play in other markets across the globe. Two scams---one in 1996 and another in 2010--- have caused serious damage to the normal growth of the market. That is why abnormality in market behaviour becomes evident from time to time. The reasons that market operators cite to substantiate rise or fall of the market in most cases do not have any relevance to the underlying causes that influence the behaviour of the market.

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