Why are stocks in an ephemeral state?

Since the outbreak of the global pandemic coronavirus, Bangladesh’s capital market has been undergoing non-stop volatility, with a nature where the market tends to clamber for one or two days only to fall for the next many days.

Although the securities regulator, Bangladesh Securities and Exchange Commission (BSEC), tries to correct the market’s behavior, the market remains unstable for a long time.

Despite the country’s capital market almost moves in an isolated manner, the Russia-Ukraine war has affected the Dhaka Stock Exchange (DSE), the country’s premier bourse, in a rude manner.

Before this, the coronavirus pandemic had hit the DSE the hardest, with the total market value of the stocks declining by 11.5 per cent from February 2020 to June 2020, the peak time of the pandemic.

The ongoing Russia-Ukraine war which started in late February last year, spilled over its adverse effects across the globe, causing currency volatility, high inflation, and price hikes of all goods and raw materials in the global market.

Due to these adversities, most companies listed on the DSE, witnessed a steep decline in their profits, while many others suffered losses in the fiscal year 2021–22 and in the first half of the fiscal year 2022-23.

Although the securities regulator has imposed a price floor mechanism on equities twice since 2020 and it is still in place to curb the constant market fall, it does almost nothing to make the market stable.

At the same time, frequent regulatory policy changes and the weak regulatory framework are a common thing in Bangladesh’s capital market, eroding investor optimism to a large extent.

Because of the unstoppable market fall, investors now fear making long-term investments, causing a severe liquidity crunch in the prime market.

Moreover, investors are now opting to remain on the sidelines instead of putting funds into scrips, as they lack a clear understanding of the market nature.

In this unfavorable situation, investors are shifting their intentions toward short-term and quick profit-gaining opportunities instead of long-term investments.

This is because the DSE indices tend to rise for one day only to fall for the next few days, and this has been a common issue since the imposition of the floor price in the stock market.

Abu Ahmed, a stock market analyst and a former professor at the University of Dhaka, said the floor price imposed against the basic concepts of the market’s demand and supply was not helping anyone— neither investors nor the regulator.

As the market was lacking scope to sell stocks, it got stagnant, and thus fund managers could underperform and lack the strength to pay dividends to investors, he added.

The current price restriction was not helping small investors, as the stock prices and portfolio values showed off were artificial, he continued.

According to a recent survey conducted by LankaBangla Securities, frequent regulatory policy changes, a weak regulatory framework, and a lack of investor optimism might impede the stability of Bangladesh’s capital markets in the year 2023.

Speaking to The Business Post on condition of anonymity, a high official of a top stock broker said, “In the context of a continuous price decline and bringing back the floor price for all shares every day, some shares are falling to their lower limits.”

“These shares are not traded at all or very little.”

Officials of various brokerage firms said due to the closure of two consecutive banks in the United States, there has been a panic in the global economy, which has further affected the domestic stock market.

The managing director of a top brokerage house said in the current situation, most investors do not have the ability to make new investments. Those who have securities in their hands are now trying to offload them for making short-term profits or to avoid further losses.

Speaking to this correspondent seeking to be unnamed, the chief executive officer of a leading brokerage house said, “The country’s stock market has been suffering a severe liquidity crisis as investors could not participate in trading due to the price limit set on shares by the regulator to halt the free fall of the price indices.”

Stocks have been on a losing streak amid a confidence crisis stemming from worries about the weakening macroeconomic situation coupled with rising inflation, he added.

He also said the prolonged bearish market condition, liquidity shortage, and lack of institutional participation altogether eroded investors’ confidence.

The stock bankers said liquidity in the market continued to be squeezed due to the floor price restriction as investors were reluctant to put fresh bets on stocks.

Snapping a two-session fall, Dhaka stocks rebounded on Tuesday, with DSEX, its key index, rising 18.7 points to settle at 6222.

But, the optimism failed to last even in the next trading session.

The DSEX, the broad index of the DSE, declined 16.3 points to close at 6,207 on Wednesday.

Meanwhile, the Dhaka Stock Exchange witnessed a decrease in investor participation, with the total turnover declining by 6.0 per cent to Tk 328 crore yesterday against Tk 349 crore in the previous session.

The market turnover was Tk 452 crore on the week’s first trading session on Sunday, referring to the fact that the turnover dropped over 27 per cent in the next three trading sessions.

The Dhaka bourse failed to uphold the recovery mode on Wednesday as cautious investors perceived the temporary upbeat momentum in the market as an opportunity to offload their holdings to secure their short-term gains from the market’s ongoing volatility, according to EBL Securities, a stockbroker, in its daily market review.

The benchmark index witnessed a downward trend from the beginning of the session, driven by prevalent profit-booking pressure on major sectoral stocks, it added.