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Wednesday, October 3, 2007

Wild rally at bourses and building-bubble

Shamsul Huq Zahid writes at FE

Speculation has always been a part of trade and investment. To some extent, it forms the basis of business and investment plans made by small traders as well as giant corporate bodies.

But what if speculation turns into a wild-guess devoid of even the slightest logic? The end result could be disastrous for those who are subscribing to such speculation.

Can anyone explain any justifiable reason for the investors' craze over the shares of the debutantee in the market for the last couple of days in the bourses?

The market, actually, was agog with speculative prices of the issue in the banking sector well ahead of its debut trading day. Some said its opening price would be between Tk 500 and Tk. 600. But they were proved wrong. Because of huge buying pressure, it started with a price of about Tk. 700 and soared to Tk. 850 at the close of the debut trading day.

On the second day of its trading on Tuesday, the Trust Bank share prices recorded yet another jump to reach Tk. 914 apiece. It might even go higher in the next few days.

The same thing happened with the stocks of some other banks, power companies and mutual funds in the recent months.

The investors seemingly are no more interested in fundamentals and dividend yields of the companies listed on the bourses. The investors, who go to bourses almost daily, are more interested in right or bonus shares. They have their own calculations on this issue. If a bank or a non-banking financial institution or an insurance company has a low level of paid-up capital, it would have to issue right shares or bonus shares to raise the same in line with the requirements set by the central bank or the regulatory body for insurance companies. So, the investors are banking on the issues having the prospect of offering right or bonus shares.

The entry of substantial amount of funds, both black and white, has made the market a fertile ground for speculative trading. The stock market in Bangladesh traverses in its own orbit. The rise or fall of the greenback or the growth prospect of the global economy or even the positive and negative development in domestic economy does not have any impact on it. It has, in most cases, remained immune from outside developments. This could be because of the virtual absence of foreign portfolio investment in the local market.

For instance, the economy is now in a difficult phase because of soaring inflation, dwindling business confidence and a slowdown in investment situation. The banks that generally run after clients to receive deposits are now in deep trouble with excess liquidity of over Tk 140 billion. The IMF has recognised the troubles facing the economy. Adviser for the Asia Pacific Department of the IMF Thomas Rumbaugh during his recent visit to Bangladesh predicted "slower than normal" economic growth during this fiscal.

But the negative developments in the economy do not have any bearing on the share market. Indices have been rising continuously except for brief pauses. The market capitalisation has already reached the all time high level of Tk 626 billion. Old and new investors have been crowding the offices of brokers at the Dhaka and Chittagong stock exchanges. And the crowd is bulging with every passing day. The cautionary notices circulated by the management of the bourses on their websites are going unheeded by investors.

A bubble, it seems, is in the process of building up. The market regulator, the management of the bourses, stock brokers and investors-all of them-- are enjoying the rally and might feel like dismissing outright such an observation. But it is high time for them to give a dispassionate look at the issue.

At the moment too many investors are chasing too few shares, leading to abnormal hike in prices of the latter. One way of neutralising the situation, to some extent, remains to be the immediate initiative to offer new stocks to the investors.

It will be worthwhile here to mention the government plan to offload shares held by it in a couple of oil marketing companies and offer shares of a number of public sector entities, including the Biman Bangladesh Airlines and the Telegraph and Telephone Board, through their corporatisation to the general investors. The Securities and Exchange Commission and other agencies concerned should also try to woo more private sector companies, including the foreign ones operating in the country, to go public. However, without right kind of incentives, the profit-earning foreign companies might not be willing to expose them to general investors' scrutiny.

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