Stock missing trust factor

Posted on October 20, 2011

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It was a spectacular crash. In 10 minutes since start of trading yesterday, the Dhaka stocks lost 137 points. The slide enlarged to 189 points in 55 minutes. But when the day closed, the index covered the slip quite a bit and ended with a 48-point loss on another day of thin trading. This happened despite the government’s new incentives to perk up the market.

Since the stocks crashed on a Black Monday on January 10 this year a lot has been said and a little done. But nothing could stymie the gradual slide in index. And the fear that the market is heading for a freefall has spread across the market now.

The beginning of the stockmarket crisis was due to greed, manipulation, and irresponsibility on the part of the government. While the index was pushed up to 8,900 from 2,800 the government was euphoric and nobody seemed to be worried that the market was going on an unsustainable path, allowing manipulators to skim small investors.

And now the crisis has entered into the realm of total lack of confidence. The price-earnings ratio of companies — the basic pointer to assess whether a share is worth buying or not — has come down to an alluring level. Yet nobody, not even institutional investors are interested to buy.

Again a wrong interpretation of the problem is being dished out by different quarters. It is liquidity crisis or the lack of investment money that is driving down the market, the policy makers are explaining. And based on this wrong assumption, new perks are being devised. Banks which have their exposure to the market below their permissible level are asked to invest. Settlement days have been shortened to make more money quickly available. And so on. The result is now visible — the tumble continues.

So what went wrong? It is the lack of confidence that is creating this new crisis. And confidence is a very sensitive issue, once it is seriously dented the effect can go a long way. Since the first market crash in January little has been done to restore confidence.

The probe report on manipulation was trashed in more than one ways. The chief of the probe committee was rather denigrated. People who are thought to be the main manipulators have remained out of the ambit of law. People the probe committee advised the government to be aware of, have again voluntarily got involved in the market, especially in DSE.

From the tenet that there is a crisis of fund, a stabilisation fund was proposed. This announcement upped the index for some days and people invested again. Then the fund was not realised, and those who were encouraged by the fund creation lost everything again.

And worst of all, the government played with public money. It lent the Investment Corporation of Bangladesh Tk 600 crore from the central bank to make fresh investment in the market. Many including this newspaper protested the move. Today, ICB suffers from a huge loss as almost one-third of that Tk 600 crore has been wiped out by the market monster.

The government asked state-owned banks to start buying shares. Today all these banks suffer from huge losses. Agrani alone saw over Tk 700 crore of its profit from shares decline. So in the name of supporting the market, public money was squandered to no effect.

Facts however say there was no dearth of money. In the primary market, the initial public offerings were 33 percent oversubscribed. In the last two months 1,50,000 new beneficiary owners (BO) accounts were opened by investors who want to buy primary shares. Institutional investors are all sitting idle although they have money. They only do not have the confidence, because they are not sure how far the market will fall.

Where actions had to be taken remains a lost world. So far three recommendations of the probe committee have been partially carried out. The book building method, the main conduit for manipulating the market this time, has been changed but the gazette notification is yet to be made. Some rules have been changed regarding the mutual fund to encourage such investment.

But people wanted more. People wanted culprits to be caught. To make things worse, the policymakers started making comments that helped erode the market’s confidence further.

The government’s futile actions to arrest the market fall artificially were wrong moves by any count. The market should have been allowed to fall. It would have stabilised at one point if confidence building actions were properly taken. Even this time, the same should be allowed. Artificial money pumping would only increase the national burden.

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Posted in: Business