Capital market outlook for 2018

Stock markets in Bangladesh experienced a strong bullish trend from 2008-10.  Average daily turnover almost doubled (Tk281.8 crore) from 2007. The positive sentiment persisted through 2009-10. However, nearing the end of 2010, the bullish trend turned into an erratic bubble. The broad index reached its historic high of 8,919, while the highest turnover recorded in a single day stood at Tk3,250 crore. Market capitalization as a percentage of GDP went up to 35.0% while the average market P/E shot up to 29.2x in 2010. The Nominal Gross Domestic Product (GDP) of the country grew moderately, by 13.2%, whereas the equity market cap grew by more than 80.0%. As such, market headed towards an inevitable downturn, with the bubble bursting in the latter half of December 2010. The downward spiral continued throughout 2011 and 2012, with the index bottoming out at 3,610 in April, 2013. Investors lost confidence in the capital market in the aftermath of the debacle, resulting in subdued trading activity. Recurrent political turmoil aggravated the situation further. However, from the second half of 2016, revamped-enthusiasm among investors was witnessed. The market became highly active, particularly in the last quarter of 2017, with an average daily turnover of Tk696.5 crore. This positive trend is still ongoing. The (Year to date) YTD average daily turnover in DSE stands at Tk909.3 crore. The broad index (DSEX) increased by 20.7% between May 2016 and December 2016, and 24.6% in 2017 (YTD). Despite such massive gains, the Market P/E ratio did not increase by much, at 16.1x only. This confirms the justification of pricing based on earnings. The banking sector booked 76.7% year over year (YoY) growth in earning in the third quarter of 2017. Although June ending stocks showed substandard performance, registering 2.3% YoY growth in its FY2017 earnings, they came back strongly in the first quarter of 2018, securing a 14.9% YoY growth in earnings. Attractive stock market valuation, very low interest rates, stable inflation, excess liquidity, excellent corporate profitability, and an overall bullish trend in the market has directed quite a significant amount of fund flow to the market during the past year. The Bangladesh economy has continued this growth despite a slowdown of the global economy. The country achieved GDP growth of 7.28% in FY2017, recording a GDP growth over 7% rate for the second consecutive year. We can reasonably expect that the export of RMG will bounce back, as most of the export oriented factories have become compliant with regulations. Moreover, with a depreciating currency, export competitiveness should improve to some extent.

Effects of low interest rate

Record low interest rates have encouraged credit growth in the country. Low interest rates discourage savings and thus encourage more consumer spending. Consumer demand is likely to be further reinforced, as the implementation of the uniform VAT law was deferred. We can expect that significant funds will continue to flow to the capital market in 2018 due to a sustained downtrend in interest rates and a depressed real estate sector. Since January 2006, the weighted average deposit rates (WADR) of banks declined by 137bps to 4.8% in Jun 2017. Though, the WADR experienced moderate pick up in September 2017 (4.9%), the real interest is still negative as the point to point inflation rate stood at 6.1% in the month. With projected inflation at around 5.5% to 6.0% for FY2018, we believe that the capital market will attract funds that flow away from bank deposits. Furthermore, the gap between interest rates on saving certificates (~11.0%) and market deposit rates (~5.3%) is ever widening. As a consequence, the sale of savings certificates surged in FY2017; Due to high returns on savings tools, the government’s interest rate liability is increasing. Even though there has not been any mention of rate cuts on savings certificates in the FY2018 budget, we anticipate that the government will be compelled to cut the rates to stay closer to market rates. Such a cut would also direct funds away from savings certificates and towards equity investment in the capital market. Given the 11th national election is due at the beginning of 2019, we expect that institutional investors will remain watchful in last three or four months before election. Trading activity may become sluggish to some extent for a transient period, yet given the strong fundamental landscape, and promising economic growth, we believe, the market will remain vibrant for most of 2018.  Zarif Ibne Arif is a research associate at UniCap Securities Limited with a special focus on macro economy, capital market, money market, banks and NBFIs. He is a graduate of Department of Finance, University of Dhaka, and passed level 1 of the CFA Exam in 2016