Express (July 20, 2011)
In the stock market, there is a saying - more carrots, less sticks. In the Bangladesh context, most of the time, the reverse is true. In our scenario, we are more engaged in restricting the supply side. The worst part is that in the recent past there were changes in the margin loans ratios 11 times in one year and every now and then surveillance teams were sent to different brokerage houses or they were asked questions over the telephone, which were good enough to shake the confidence of the investors. There are circuit breakers for individual share prices but the trading of some shares were halted even when the increase of the share prices were below the limit. The perception of the stakeholders, which is the main driving force in any market, is most of the time ignored.
With a very limited number of shares to play around, when liquidity in the market increases, the price upswing results in a bullish market as more and more liquidity comes in, jeopardizing the market structure. As a result, the attention of the regulator (s) is drawn to do something to stop the price spiral, and the quickest and easiest way to do this is to create a liquidity crunch, shaking the confidence of the investors. A stock market crash is a worldwide phenomenon and most of them are market driven. But in our case, it transpired, it was administratively driven. When all these problems compounded, the stock market crashed a few months ago. In a volatile situation, the market becomes a heaven for the short-term traders, which ultimately turns out to be difficult for many of them. The waiting time for the long-term investors becomes longer.
The present generation stock traders arm themselves with charts and computer generated graphics that predicts future price direction. They sit day after day in front of screens, mesmerised by blinking lights and ever changing numbers in a deafening cacophony of information overload. Against this backdrop, George Soros' the 'Theory of Reflexivity' detailed in the book 'The Alchemy of Finance' is a shot in the dark. This is the first modern non-technical effort to describe and forecast the dynamics of interplay between the participants in the process.
It describes the dynamics of the path between points of extreme valuation and equilibrium in the marketplace. This is particularly a guide for the average investors. Because of the lack of understanding of the path of big price moves, their staying power has been weak (as well as the returns) with long near the bottom or short near the top of major market moves. Soros gives the average investors critical insight into that path and thus more confidence in their investments.
In the Dhaka Stock Exchange (DSE), there were 412 securities listed as on December 2008, whereas in Dec'09, Dec'10, and June'11 there were 415, 445 and 490 listed securities respectively when the DSE General Index (DGEN) stood at 2795.34, 4535, 8290 and 6117.23 points respectively during the period. Where the listing of securities increased by only 1.08 times at the end Dec'10 over Dec'08, the DGEN has increased three-folds over that period. If the liquidity available at a particular point of time could get spread over horizontally across more securities listed or allowed to be listed, perhaps the average price increase would not have gone to that high an extent necessitating a forced crash. Unless efforts are taken to widen the supply side by encouraging more companies to offload their shares, a situation may again arise soon to curtail the liquidity flow to the market, which will not be a market-friendly move for a sustained development of the capital market, leading to crash again.
In this paper, we have tried to measure the volatility of different shares listed in the Dhaka Stock Exchange and add a little bit of analysis on the factors causing this with the hope that this analysis may somewhat benefit the policymakers as well as the different players in the market. In fact, volatility is a statistical measure of the scale of fluctuations in the price of a share, a commodity or a stock market index in the recent past. It is generally taken to be a good measure for the relative risks of an asset -- the higher the volatility, the greater the risk of losing money. Volatility, however, is not a static thing. It fluctuates -- sometimes quite sharply -- over time. A long-term investor may take this intermittent activity in his or her stride, but it assumes particular importance for short-term traders. In doing so, we have tried to analyse the volatility across the market according to the following groups: Group-1 by Categories -- A, B, N & Z, Group-2 by Face Value , Group-3 by Sectors, Group-4 by Price to Earning (PE) Ratio and Group-5 by DGEN.
The time series of the share prices span over December 2010 to April 2011. We have not considered any data before December 2010, as most of the shares were split during this period, amalgamation of the data for the period before the data under consideration will need major adjustment.
Categories: A-category companies are those which are regular in holding the current annual general meetings and have declared dividend at the rate of 10 per cent or more in an accounting year. B-category companies are those which are regular in holding the current annual general meetings, but have failed to declare dividend at least at the rate of 10 per cent in an accounting year. Z-Category companies are those which have failed to hold the current annual general meetings or have failed to declare any dividend or which are not in operation continuously for more than six months or whose accumulated loss after adjustment of revenue reserve, if any, is negative and exceeded its paid-up capital. G-category companies are greenfield or start-up companies. N-category companies are all newly-listed companies except greenfield companies.
The table below is the category-wise volatility of instruments. Among all the categories, the 'N' category shows the highest volatility of 8.27 per cent, which is due to substantial rise in price as there is no price limit on the day of commencement of trading. The 'B' category shows the second highest volatility amounting to 6.68 per cent. Perhaps, the speculative factors may have ruled more here.
Face value: Face value is the nominal value of a security at the time it is issued. For stocks, it is the original cost of the stock shown on the certificate. It is also known as par value. However, stocks may trade at a discount, which is less than the face value, or at a premium, which is more than the face value, in the secondary market. That is the stock's market value, and it changes regularly, based on supply and demand. In the DSE, a listed company's face value can be set at Tk1.0, Tk10 and Tk100.
The table below shows the face value based illustration of volatility of stocks covered. The average volatility of the Tk 10 face value shares was the highest (6.44 per cent) compared to the average volatility of the rest. Since the circuit breaker limit is higher for the Tk 10 face value shares, there is more room for fluctuation. Because of the split of shares from Tk.100 to Tk.10, the small and medium investors were more attracted and exercised more varied options to buy and sell this category of shares. As the Tk 1.0 face value shares include only AIMS1STMF (AIMS First Mutual Fund), there is perhaps a limited number of market players aiming for this share. It may transpire for this more or less stable position that for the small and medium investors, the Tk 100 face value shares are not very popular.
Sectors: Looking at the sector-wise contribution to the average volatility, it seems that the 'ceramic' sector has been maintaining the leading position. In the year 2010-11 the 'ceramic' sector's average volatility was 6.97 per cent. Besides the 'ceramic' sector, the average volatility of the 'textile', 'IT', 'Paper and Printing' sectors shows the highest volatility compared to the rest. While the 'corporate bond' sector shows the lowest volatility. As 'corporate bond' comprises of long term debt instruments, which pay a fixed sum each year, its volatility is the least.
PE Ratio: The price to earnings ratio, which theoretically determines the time an investor needs to wait to get back the invested amount, reflects the price offer per taka against the earnings of a company's share. The DSE generally calculates two types of PE ratio - simple average and weighted average.
The average volatility of shares with a PE ratio of '25 to 40' is the highest compared to the average volatility of rest. The sector under this category comprises of most of the industries but the dominants are like, Insurance, Engineering, Textile, Pharmaceutical and Chemical industries. Fluctuations in this category are very unusual. May be because of the small number of shares in the market in this category, and because of more influence of speculative factors, the fluctuations were greater.
While the shares with a PE ratio of less than 15 shows the lowest volatility. This category includes miscellaneous sectors, however, banks and mutual funds are the most important ones. This is a stable sector because these are more or less stereotyped shares formatted according to the rules and norms and there are large volumes of shares available in the market, so playing around with these is very difficult. These shares are fundamentally strong and are also long-term investors' paradise.
DGEN: The DSE has three major indices to reflect market behaviour, namely, DSE All Share Price Index, DSE General Index, and DSE-20 Index. DSE reintroduced the All Share Price Index (DSI) on March 28, 2005. On November 27, 2001, the DSE introduced the benchmark price barometer DSE General Index (DGEN) with a base-index of 817.62 points. The index excludes companies of Z-category and is calculated on the basis of price movement of individual stocks. The entire market capitalisation, excluding the Z-category, is taken into consideration in deriving the general index. The DSE-20 index was introduced on January 01, 2001. The DSE-20 index has the basis of 1000 base-index.
The volatility of DGEN over the last five months. shows it was most volatile in February 2011, and the least in April 2011. The DSE General Index reached the highest level at 8918.51 points in December 2010 during this 5-month period under study but it plummeted to 6050.85 points at the end of April 2011.
After this rise, all entrusted with the job of regulating the market were of the opinion that the market is not sustainable, and as a result, the regulators stepped in and actions followed in the wake unleashing confidence-loss among the small investors, liquidity crunch ensuing inactivity of most of the big and institutional investors. As the market continued to bleed, retail investors dumped shares in panic sale with big traders still waiting for bargain-hunting and institutional investors such as banks and financial institutions continued to stay in the sideline, observing the situation from a distance. The market, lacking direction due to growing insouciance of these big players, continued ,however, with a daily turnover hovering around Tk 5.0-7.0 billion.
There was a general awareness that the boom was unsound and unsustainable, but few people got their timing right, and ultimately that turned out to be expensive mistakes. It is easy to reconstruct the sequence of events that led to the crash. Obviously, the boom was fed by the excess liquidity that could not be absorbed by the limited number of shares in the market. Consequently, it was a reduction in liquidity that led to the crash.
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