Pre-budget rally might be the buzzword for the stock markets this year. The markets historically set positive trend after the budget over the last two years, but this year is the exception.
The average positive return for the DSEX two weeks after a budget had been 0.1% in 2014 and 1.9% in 2013, Dhaka Stock Exchange (DSE) data shows.
But before the budget in the two years, the DSEX gave a negative return of 0.2% and 6.8% respectively.
Interestingly, this trend has reversed in this year as the new budget has brought a negative return for DSEX, 1.4%, after two weeks despite sops announced for the stock market in the budget.
But the stock witnessed a healthy return of 6.5% before the budget.
“One of the key factors is that banks will have to bring down their exposure within the regulatory limit,” said Tanim Noman Sattar, chief executive officer of Alif Assets Management.
According to the Bank Company Act (amended), banks will have to cut down their stock market exposure by next year to 25% of their equity.
As of last week, the total investment of banks stood at Tk23,800 crore in the stock market and by July, 2016, this investment will be reduced to Tk18,000 crore, according to Bangladesh Bank.
This means that the banks will have to sell their holdings worth Tk5,800 crore to pull out fund from the market in order to comply with the regulatory limit.
However, IDLC Investments Managing Director Md Moniruzzaman said the market was highly-anticipated over the budget, which brought fantastic pre-budget rally. “Investors started to book profits on the rally,” he added.
The average daily turnover at DSE declined almost 40% to around Tk400 crore as of June 18 since the budget announcement, turning the investors cautious.
“The market has a tendency to consolidate after a budget. It typically gives high returns in subsequent months,” said an analyst at a top brokerage firm.
He believes that the period before the budget announcement is “a non-event” and the market starts reacting only after a budget.
Finance Minister AMA Muhith presented the budget on June 4 against the backdrop of sky-high expectations, with some describing it as the most important economic event for the country’s stock market this year.
The budget’s main theme was to ramp up growth, which Muhith predicted would accelerate to 7% in the fiscal year starting in July, from 6.5% in the outgoing fiscal year.
Perceived as market-friendly budget, the FY16 budget offers several sops for the capital market unlike last year.
“Obviously, corporate tax rate cut is the biggest one while there are some other measures as well which are intended to bring back normalcy in the market,” said Lanka Bangla Securities in its analysis.
The budget’s key features include a reduction in the corporate tax rate of listed companies (except banks, non-banking financial institutions (NBFIs), insurance, telecommunications and tobacco) to 25% from 27.5%.
The corporate tax rate of banks, NBFIs and insurance companies has been cut to 40% from existing 42.5%. To lower corporate tax rates means to improve the longer-term visibility of corporate earnings.
The rule of hiking tax rate to 35% for listed companies paying less than 10% dividend has been proposed to withdraw.
“This will actually lower the tax rate of junk shares or stressed companies by 10%,” said the leading securities firm.
The existing provision of 10% deduction at source on income from share market by any company or partnership firm was also proposed to cancel.
The capital gain tax will be finalised at the time of tax filing. This will relieve merchant bankers and stock brokers from complex calculations, said the analysis of the brokerage firm.
In order to develop an effective bond market, this budget proposes withdrawal of existing 5% upfront source tax on interest income of Treasury bond and Treasury bill.
“This is expected to facilitate secondary trading of bonds,” it said.
