Long-term investments in the capital market pay off hefty returns despite volatile situations, better than banks’ deposit income, as the real interest rate on bank deposits turns negative if inflation is taken into account.
The capital market serves as an ideal platform for long-term investment in quality companies. Around nine listed companies’ yearly average return with capital gains and dividend reinvestment paid to investors was over 20 per cent, says a study conducted by EBL Securities Limited, a leading stockbroker.
This study aims to examine top-performing stocks listed on the Dhaka Stock Exchange since the inception of the DSEX index on January 27, 2013. Given the speculative nature of the market, they have employed several fundamental parameters during the company screening process.
Since its inception in 2013, DSEX has yielded a holding period return of 54.1 per cent till April, 2023. During this period, the daily average turnover of the market amounted to Tk 680 crore.
Managing Director and CEO of Prime Bank Securities Limited Md. Moniruzzaman told The Business Post that if investment is made properly, then more profit comes from the capital market than banks and the financial sector.
“Investors should choose a company with well-defined fundamental parameter in this regard. But there is a lack of fundamental companies in our stock market,” he said.
The leading stockbroker has computed investment returns for the selected companies and categorised them into three groups--capital gain, total return without dividend reinvestment, and total return with dividend reinvestment.
The current stock market has a stable environment that a smart investor needs. If investors take this opportunity, they can get more returns than the money market, market insiders and analysts said.
Analysing the data on inflation rate and average bank deposit rate from FY13 to FY22, it was seen that investors could not benefit by keeping money in the banks compared to the capital market. Even since FY17, the real interest rate on bank deposits has been negative when inflation is taken into consideration.
During this period, the depositors were facing losses while depositing money in the banks. But at the same time, investors have benefited by long-term investments in fundamental companies in the capital market.
According to the Bangladesh Bureau of Statistics (BBS) and Bangladesh Bank, inflation was 6.78 per cent in 2013 and the average bank deposit rate was 8.53 per cent in FY13. The difference between the deposit rate and the inflation rate was positive. It means that the real interest rate was positive by 1.75 per cent.
The depositors made some profits by keeping money in the banks. Similarly, in the FY14, FY15, and FY16, this difference was positive, but it was less than 1 per cent.
However, the depositors have been facing losses by keeping money in the banks since FY17. Inflation was 5.44 per cent in that year, and the average interest rate on bank deposits was 5.17 per cent, meaning the difference between deposits and inflation was negative 0.27 per cent. This continued following FYs, and it continues at present. This difference increased to negative 1.04 and 2.13 per cent in FY21 and FY22 respectively.
In May this year, the inflation rate was 9.94 per cent and the average interest rate on deposits was 4.5 per cent. It showed that by keeping money in the banks, depositors are now actually facing a loss of 5.4 per cent to inflation.
As per the monetary policy for the first half of the fiscal year 2023–24, a well-developed capital market is a must for ensuring long-term investment and the country’s economic development. But public and private investments in Bangladesh largely depend on bank financing due to the absence of a well-steamed capital market.
Bangladesh Bank lifted the 9 per cent interest rate cap and declared a reference lending rate, known as "SMART" (six-month moving average rate of treasury bills), of 7.13 per cent for July. Banks can apply a margin of up to 3 per cent over the SMART rate. The central bank also lifted the 6 per cent cap on deposit rates. As per the new decision, the deposit interest rate will increase soon.
Top 20 performing stocks based on fundamental parameters
United Power Generation and Distribution Company, an independent power producer, became the first company to pay the highest return to investors after being listed on the stock exchanges, as per the EBL Securities’ analysis.
The power sector company has paid a total return of capital gain with dividend reinvestment of 708 per cent since 2015, while the total return compound Annual Growth Rate (CAGR) with dividend reinvestment is 28.94 per cent.
Meanwhile, United Power made Tk 1,015 crore in net profit in FY22, which was 8.64 per cent less than Tk 1,111 crore in FY21. It paid a 170 per cent cash dividend to shareholders for FY22.
Hwa Well Textile has paid the second-highest return among more than 350 listed companies to investors in the last 10 years. The textile company’s total return of capital gain with dividend reinvestment was 745 per cent, while the total return CAGR with dividend reinvestment was 26.40 per cent.
Bangladesh Shipping Corporation (BSC), the state run publicly traded company, became the third-highest return position as per the EBL Securities study.
BSEC’s total return of capital gain with dividend reinvestment was 937 per cent, while the total return CAGR with dividend reinvestment was 25.20 per cent in the last ten years.
Marico Bangladesh’s total return was 807 per cent in the last 10 years. The multinational company’s annual average return with dividend reinvestment was 23.61 per cent.
According to the EBL Securities study, Reckitt Benckiser is in the fifth position among the top 20 performing stocks based on fundamental parameters.
Berger Paints’ total return of capital gain with dividend reinvestment was 732 per cent, while the total return CAGR with dividend reinvestment was 22.58 per cent in the last ten years.
Bangladesh Steel Re-Rolling Mills Limited (BSRMLTD) has given investors an average return of 22 percent, including capital gains and dividend yields.
As per the EBL Securities report, Paramount Textile’s total return CAGR 21.80 per cent in the last ten years.
BAT Bangladesh, a multinational tobacco product manufacturer, has paid investors a total return of capital gain with dividend reinvestment of 572 per cent, while the total return CAGR with dividend reinvestment was 20.10 per cent.
Another top 20 performing stocks based on fundamental parameters are Eastern Housing, BEXIMCO Limited, Matin Spinning, Sonar Bangla Insurance, Square Pharmaceuticals, Pioneer Insurance, Meghna Petroleum, Eastern Bank, Bank Asia, City General Insurance, and LafargeHolcim Bangladesh.
