Stock prices bounce back amid low turnover, thin transactions

FE Report (January 26, 2011)

Trading on the DSE resumed Tuesday with a positive note. However, the turnover was abnormally low -- Tk 2.06 billion -- with a revised circuit breaker mechanism in place for transactions of individual issues.

The revised circuit breaker mechanism, apparantly, discouraged investors from selling their stocks in a situation marked by high demand pressure.

Shares prices on the Dhaka Stock Exchange (DSE) soared and all indices gained nearly eight per cent when the market re-opened after a gap of two trading sessions.

"The market is likely to be stable as the government has taken a series of positive measures regarding the stock market. The measures are expected to bring back the investors confidence," analysts said.

The steps, taken by the government included lifting of index circuit breaker, postponting the book building method, forming independent commettee to investigate the reson for the build up of the bubble and then the dramtic collapse, seems to have helped restoration of some confidence in the market, they said.

However, they said it is too early to say weather the market will stablise or not.

As soon as the trading floor opened at 11 am, investors started buying shares and within one hour DGEN gained more than 492 points. Over the next three hours the index remained almost flat as most of the scripts touched the individual circuit breaker limits. The general index (DGEN) finnaly clsoed 494 points up.

The institutional investors were the most buyers while retail and non-resident Bangladeshi (NRB) investors were the sellers in the day's thin trading.

The benchmark DSE General Index (DGEN), the main gauge of the DSE, surged by 7.82 per cent or 494.78 points to end at 6821.08.

The broader DSE All Shares Price Index (DSI) ended at 5666.20, up by 7.66 per cent or 403.09 points. The DSE-20 including blue chips index gained 7.99 per cent or 329.73 points to 4452.55.

However, total turnover came down to only Tk 2.06 billion, which was equivalent to 6.25 per cent of the highest ever turnover on December 05 last.

Total turnover was very low as there were a few sellers on the floor. As a result, many of the investors could not buy shares. The number of transactions on Tuesday stood at only 29200 compared to 389310 on December 05 last.

The market reacted positively as almost all the companies hit the upper limit of their individual circuit breaker on the day.

The SEC reduced the individual circuit breaker limit for individual companies from Tuesday in an effort to control abnormal rise or fall in share prices on a single trading day.

According to the revised circuit breaker system, a share worth up to Tk 200 cannot go up or down by 10 per cent on a single day trading, which was earlier 20 per cent.

Under the revised circuit breaker, market prices of shares ranging between Tk 201 and Tk 500 cannot go up or down by 8.75 per cent or by Tk 37.50.

The limit is 7.5 per cent or Tk 112.50 for shares with price tag between Tk 501 and Tk 1,000.

Stocks with prices ranging between Tk 1,001 and Tk 2,000 cannot increase or decrease by 6.25 per cent or by Tk 100.

The price cannot rise or fall by 5.0 per cent or Tk 187.50 if share value ranges between Tk 2,001 and Tk 5,000.

The limit is 3.75 per cent or Tk 300 for shares worth Tk 5,001 and above.

Professor Abu Ahmed of Economics Department of Dhaka University said, "The individual circuit breaker forced many investors to buy junk shares as they could not go for good shares because of the circuit breaker."

"The good shares had touched the circuit breaker within a very short time which forced the investors to buy junk shares," he said.

Many investors said that they did not sell shares as they had bought shares at higher prices earlier. And they were also gaining confidence by the government's initiatives. So, they want wait for a few more sessions.

"I do not want to sell shares now as the prices are not enough to cover my loss.," said Salam, a retail investor.

Terming the market's behaviour "abnormal", Professor Mahmud Osman of finance department at Dhaka University, said, "The gains do not show that normalcy has returned. The volume of sales was at a two-year low and some weaker stocks have also gained along with fundamentally strong ones."

"The investors are gaining confidence as the government took some market- friendly steps. There was no panic sale and there were a good number of buyers on the floor," said Yawer Sayeed, managing director of AIMS Bangladesh, an asset managemnt company.

He also said that the investors will be more confident if the government restructured the Secutirites and Exchange Commission (SEC) within the shortest posible time as it has failed to stabilise the market.

However, he said "We have to wait for a few more sessions to see the final results.

Banks' exposure to capital market should be within permissible limit: Experts

FE Report (January 25, 2011)

Some eminent bankers, economists and stock analysts recommended Monday a limited exposure of banks to the country's stock market, reports BSS.

The recommendation came when some people were demanding banks' increased exposure to stock market to help restore of stability.

Sources in the Bangladesh Bank (BB) told the news agency that the governor already held separate meetings with the chief executives of the banks that have earned substantial amounts of profit by investing funds beyond the permissible limit under the Bank Company Act.

According to the sources, the aggregate profit earned by some banks from stock market stood at Tk 20 billion. The Act limits a bank's investment in capital market to a maximum of 10 per cent of its total liabilities.

The governor at the meeting was learnt to have advised the respecting banks to deposit the money with the central bank as their reserve, which would eventually help them increase their lending capacity.

"This is a good idea," said former BB governor Dr Saleh Uddin Ahmed.

He said the central bank could not take risk on depositors' money by allowing banks to invest in any risky venture like capital market beyond their permissible limit.

Referring to the recent argument that some of the latest action of the central bank's created liquidity crunch in the stock market, Ahmed said, "It is not right to blame the Bangladesh Bank for the stock market fall".

"It would have been far better had the central bank taken the steps before," said the economist who was the immediate past governor.

"We wanted a definite stance from the central bank on 'liquidity creation' in the bourses," said Mamun Rashid, a leading banker and economic analyst.

But he observed that the Bangladesh Bank's (BB) effort to 'raise a firewall' between banks and their merchant banking subsidiaries was a good one to protect the banking sector from the adverse affect of the very recent stock market debacle.

Mamun said the central bank "has to drive changes or even run supportive measures, in the context of the overall monetary policy".

He advised cautious regulatory measures as "no one has the right to break investors' confidence in the market by making decisions without any impact analysis".

Mamun said the market is going through a correction and we all should allow this to happen and avoid 'panic creation' by shifting decisions.

"There are still rooms for investment in good shares in the growth sectors and in shares with better price earning ratio" he said.

He also saw positive signals from the institutional investors, including the foreign ones to invest in view of recent corrections.

Kazi Mahmood Sattar, Chairman of the Association of Bankers Bangladesh (ABB), said banks' involvement should be limited as per the rules and regulations.

He said it would be more damaging to the economy if the banks suffer the same crisis like the stock market.

Md Nurul Amin, Vice Chairman of ABB and Managing Director National Credit and Commerce Bank Limited also supported the central bank's role for limiting the banks exposure to protect the banking sector from the volatility of the stock market.

He said blaming the BB for the recent price fall of shares is wrong because the central bank only instructed the banks to follow the stipulated regulations.

Stock analyst Syed Mahbub Rashid also believed that pumping money from the banking sector would not bring about sustainable stability in the stock market.

He suggested restructuring the Securities and Exchange Commission (SEC), allowing merchant banks to fix the rate of margin loan within a wide ceiling and coordinated measures to restore investors' confidence.

'Investor of last resort' swings into action as stock plunges

FE Report (January 25, 2011)

The Investment Corporation of Bangladesh (ICB) and its subsidiaries have bought shares worth around Taka 7.0 billion in the last four trading days of the stock exchanges, prior to suspension of operation in the bourses on January 20 last, officials of the state-managed investment institution said.

But the market crash could not be prevented despite such purchase operation by the ICB and its subsidiaries, known as "the investor of last resort".

"We are doing all we could to shore up the stock market. In fact, we have buying shares for more than a month," said a senior ICB executive.

The corporation and its subsidiaries alone bought 23-24 per cent of the shares sold in the past trading days -- three of them were halted after the benchmark index at the Dhaka Stock Exchange crossed it's the then circuit-breaker threshold at 225 points.

Normally, the state-owned investment bank accounts for 10 per cent of the trading that takes place at the Dhaka Stock Exchange (DSE). In the last six months it traded some Taka 230 billion worth of shares -- the best performance among the institutional investors.

"The problem is we are the only big institutional player who have been active over the last few sessions," he said. "If others follow us forcefully in the market, the slide can be stopped and confidence can be restored."

He spoke on condition of anonymity as he is not "authorized" to talk to the media.

The Bangladesh Bank has pumped Taka 4.00 billion to the market through the ICB and its subsidiaries in a bid to halt the plunge.

"But it took us only two days to spend the money. If you have to continue purchase for weeks, we may face a severe liquidity problem," he said.

ICB's concern is that the risky investment in a slumping market may take a toll on its balance sheets. In the years after the 1996 crash, it suffered a massive erosion in profit.

This time Taka 4.00 billion the BB has lent is tagged with five per cent interest rate and will have to be paid back in 90 days.

"If the slide continues for years, we have to forget the kind of results we have seen over the last four years. The honeymoon seems to be over," said the official.

The last time it swung into buying binge in the aftermath of the 1996 stock crash, the ICB purchased shares for years to prop up a plunging stock market.

It took ten years to see the market give the kind of return it has been looking for. The last two consecutive years they declared hefty dividend, largely to the government.

Amid a new stock crash, the lone state-owned investment bank found itself in a familiar role: buying shares at the behest of the government to buttress a slumping market.

The market is still overheated -- the average price-earning ratio is around 23, up from standard 15 -- and any purchase at this time could easily slip into the red, according to some analysts.

Still all eyes will be on the "investor of last resort" as trading at the stock market resumes today (Tuesday) after two days of suspension. ICB officials said they would be active as ever.

"We shall be playing our usual role: bringing stability back in the market," M Fayekuzzman, its soft-spoken managing director said, in a steely voice.

"If there is any injury in the market, our role is to repair it," he said, adding the bank has been planning some "long-term" measures to boost the market.

He did not elaborate what the long-term steps are. But he added the target was to make the market "fully operative".

"The ICB has been created to develop the capital market and broaden the base of investment. And that's the role we are now playing," he said.