One of the much admired developments of the stock market, and its associated regulators and overall stakeholders, during the past two years of management by the current honourable Bangladesh Securities and Exchange Commission (BSEC), has been the slow but steady institutionalisation of the market.
While this is a slow process, with retail investors still being a strong portion of the market and exerting substantial influence in terms of market behaviour and public influence, the attention of the market operators to the Monetary Policy Statement (MPS) of the Bangladesh Bank is a significant sign of maturity.
In developed markets, or even regional ones, where the comparisons are more appropriate, influence of changes in central bank policy rates are transmitted to the stock market because of resultant changes in financing cost, demand growth and specific initiatives, such as the welcome recent development of $1.6bn in international financing by domestic firms.
Companies listed with the market, if they are following high levels of corporate governance, reporting well audited accounts, and having sound business strategy, will be affected, either positively or negatively, by changes in policy rates. In basic terms, with the lowering of policy interest rates, the rates used by Bangladesh Bank to lend funds to banks through their various mechanisms, will cause a rise in the prices of listed securities due to their expected lower financing cost and resulting higher income.
As a result, the statements, verbal or written, of central bank governors are scrutinised in great detail, in developed markets, and increasingly so in developing countries with growing capital markets.
The Bangladesh Bank unveiled, on Thursday, the country’s 16th monetary policy aiming mainly to keep the inflation rate at 7%. The stock market fell as the Benchmark General Index DGEN was down by 2.19%, closing at 4,312 points. The market was up for the first hour of trading, recovering from the earlier week of weak earnings release by several large listed companies on their half-year, ie January – June 2013, performance.
The market began its slide after the MPS release, and ended the day almost 2% lower than the previous day. My point is not that the market fell, which is a matter of investors deciphering information, but the fact that the market does, and should, react to the monetary policy statements of the central bank.
To all the naysayers of the capital market being a den of manipulators and consortia trading, the reaction of the market to actual policy is a sign of maturity, which is almost lost in the din of layman comments regarding the market.
Over the past six weeks, the Dhaka Stock Exchange had risen by almost 30%, from the DGEN mark of 3600 to its highest of 4750, on the back of expected higher positive earnings declarations and year-end dividend announcements of the large cap fuel and power, consumer and telecommunications companies.
There is little dispute that the growth of aggregate demand in the domestic economy is strong, due to various reasons of demographics, remittance, urbanisation and changing tastes, and rising disposable incomes due to higher wages. As such, the growth of earnings of consumer, internet related and specific fuel companies, along with their expected dividend declarations, was a strong influence on the earnings rising phenomenon.
As the monetary policy statement rightly stated, the major risk in the economy going forward is political risk. Inflation is down, foreign reserves are high, liquidity in the banking sector is strong, but private sector credit is weak.
As such, due to political uncertainty, capital expenditure related growth in 2013 is expected to be weak. Demand driven growth being strong in 2013, being driven by factors which are essentially macro driven elements of income and spending, is expected to continue to grow.
The stock market operators seek signals from the central bank policies; especially those related to interest rates and specific rates for certain preferred or thrust industries. The specific rate not being cut at this point ended up being a signal not taken positively. So be it, but it is far better for investors to focus on regulatory policy rather than rumours.
The intelligent investor in the market is strongly recommended to take into account over-arching issues such as government policy rates, specific regulatory steps being taken, corporate governance, audit quality and also specific issues such as key sectors, earnings growth, and seasonality, before they make their respective investment decisions. The gains and losses will only be theirs, so the homework is very important. Simple.
