Slide in stock prices: Reasons and remedies
Abu Ahmed
Everyone, who is somebody or anybody in the state of affairs over stocks' prices and the market as a whole, hoped that the year 2016 would be different from 2015. They expected stock prices to rebound in the New Year and more good news to be forthcoming for the market as the year progresses. But as things happened in the first few weeks of the first month-January--the frustrated mood of the investors further deepened. Throughout the year 2015, banks were blamed for price falls of stocks, as these financial institutions, as many investors thought, were the net sellers of stocks under a regulating order of the Bangladesh Bank (BB). The BB directed them to adjust their excess exposure in the stock market by the middle of 2016. But later the central bank relaxed that condition by amending regulatory order saying that banks were not to count their capital supplied to the subsidiary merchant banks as the exposure limit to the capital market. Such an order gave them a freedom to invest more of banks' money in the capital market. When the market was not responding positively even after the relaxation of conditions for banks' investment in the capital market, some investors blamed non-availability of margin loan as the reason for the continuous sluggish condition in the market. But when in the month of January and in the period thereafter the restriction on the margin loan was gone, the market was not moving, to more dismay of the investors. Both price index and the turnover were moving against investors' expectation. The market goes up one day, followed by falls in the next two days as if it is behaving like once beaten twice shy.
Two years back, investors and the concerned policymakers alike blamed high interest rates on banks' savings and fixed deposits and on the government's savings instruments as the reasons for why the market did not move positively. But in the year 2015, both the interest rates offered by the banks and by the saving instruments were slashed down. Now what should be blamed for the stock market's present sluggish condition?
But economics as a science has an explanation for most of everything that takes place in the marketplace. It offers explanation in terms of demand and supply. When the price of a particular commodity falls under a market condition, the phenomenon is explained by oversupply compared to demand for the commodity. Here in case of stocks' price falls, the same explanation also holds true, i.e. supply of stocks is going ahead of the demand leading to a price fall. Another way of explaining the same is in terms of how much money goes out of the market by way of stock sales and how much money enters afresh for creating demand for stocks. Money goes out of the market when IPOs (initial public offerings) are sold, when right offers are made, when sponsors' sale of their so-called bonus shares happens and when some other investors, both retail and institutional, take away money by selling the stocks.
In the last few years, many IPOs were sold, many sponsors sold their both bonus and original shares and many investors became inactive after that. Compared to the amount of money that went out through the sales, less of money entered the market and the result was the continuous slide in the prices of stocks. Also, Bangladesh's stock market becomes lively when foreign portfolio investors show interest in it, but in the recent months, they turned out to be the net sellers. What we see now is that the market is no more ready to absorb more supply of stocks without giving in to a slide of their prices. However, the sliding trend will be stopped automatically once stocks become cheaper. Our stock market does not respond, on an instantaneous basis, to any good or bad news of the corporate world. It responds slowly. The cuts in the interest rates will have an effect on the stock price but slowly. With the present p/e (x) (price-earnings multiple) at around 16, the market cannot be said to be cheap. Many of the companies listed with the bourse offered only junk stocks, which are not at all worth investing in for a long-term period. In the absence of fundamentally strong stocks, the gamblers turned out to be movers and shakers of the market.
The investors are tricked to buy overvalued stocks both by the gamblers and the syndicate traders as well as by the issuers. When the BoI (Board of Investment) chief executive says that the stock market is driven by the gamblers, he is partly correct. But mere lamenting will not do any good to the market. The best thing someone can do to the market would have been to make an effort to supply the market with quality stocks. When the multinationals' executives say they do not want to come for listing, it only disheartens the investors more.
Policymakers' job is not to abandon the market, because it is not functioning; their job is to bring in more reforms, thereby paving the way for companies with good fundamentals to get listed with the bourse.
In a normal condition, the stock market should have led the economy, but in our case, it is just the opposite. We should examine why.
The writer is Professor of Economics, University of Dhaka.
abuahmedecon@yahoo.com
Everyone, who is somebody or anybody in the state of affairs over stocks' prices and the market as a whole, hoped that the year 2016 would be different from 2015. They expected stock prices to rebound in the New Year and more good news to be forthcoming for the market as the year progresses. But as things happened in the first few weeks of the first month-January--the frustrated mood of the investors further deepened. Throughout the year 2015, banks were blamed for price falls of stocks, as these financial institutions, as many investors thought, were the net sellers of stocks under a regulating order of the Bangladesh Bank (BB). The BB directed them to adjust their excess exposure in the stock market by the middle of 2016. But later the central bank relaxed that condition by amending regulatory order saying that banks were not to count their capital supplied to the subsidiary merchant banks as the exposure limit to the capital market. Such an order gave them a freedom to invest more of banks' money in the capital market. When the market was not responding positively even after the relaxation of conditions for banks' investment in the capital market, some investors blamed non-availability of margin loan as the reason for the continuous sluggish condition in the market. But when in the month of January and in the period thereafter the restriction on the margin loan was gone, the market was not moving, to more dismay of the investors. Both price index and the turnover were moving against investors' expectation. The market goes up one day, followed by falls in the next two days as if it is behaving like once beaten twice shy.
Two years back, investors and the concerned policymakers alike blamed high interest rates on banks' savings and fixed deposits and on the government's savings instruments as the reasons for why the market did not move positively. But in the year 2015, both the interest rates offered by the banks and by the saving instruments were slashed down. Now what should be blamed for the stock market's present sluggish condition?
But economics as a science has an explanation for most of everything that takes place in the marketplace. It offers explanation in terms of demand and supply. When the price of a particular commodity falls under a market condition, the phenomenon is explained by oversupply compared to demand for the commodity. Here in case of stocks' price falls, the same explanation also holds true, i.e. supply of stocks is going ahead of the demand leading to a price fall. Another way of explaining the same is in terms of how much money goes out of the market by way of stock sales and how much money enters afresh for creating demand for stocks. Money goes out of the market when IPOs (initial public offerings) are sold, when right offers are made, when sponsors' sale of their so-called bonus shares happens and when some other investors, both retail and institutional, take away money by selling the stocks.
In the last few years, many IPOs were sold, many sponsors sold their both bonus and original shares and many investors became inactive after that. Compared to the amount of money that went out through the sales, less of money entered the market and the result was the continuous slide in the prices of stocks. Also, Bangladesh's stock market becomes lively when foreign portfolio investors show interest in it, but in the recent months, they turned out to be the net sellers. What we see now is that the market is no more ready to absorb more supply of stocks without giving in to a slide of their prices. However, the sliding trend will be stopped automatically once stocks become cheaper. Our stock market does not respond, on an instantaneous basis, to any good or bad news of the corporate world. It responds slowly. The cuts in the interest rates will have an effect on the stock price but slowly. With the present p/e (x) (price-earnings multiple) at around 16, the market cannot be said to be cheap. Many of the companies listed with the bourse offered only junk stocks, which are not at all worth investing in for a long-term period. In the absence of fundamentally strong stocks, the gamblers turned out to be movers and shakers of the market.
The investors are tricked to buy overvalued stocks both by the gamblers and the syndicate traders as well as by the issuers. When the BoI (Board of Investment) chief executive says that the stock market is driven by the gamblers, he is partly correct. But mere lamenting will not do any good to the market. The best thing someone can do to the market would have been to make an effort to supply the market with quality stocks. When the multinationals' executives say they do not want to come for listing, it only disheartens the investors more.
Policymakers' job is not to abandon the market, because it is not functioning; their job is to bring in more reforms, thereby paving the way for companies with good fundamentals to get listed with the bourse.
In a normal condition, the stock market should have led the economy, but in our case, it is just the opposite. We should examine why.
The writer is Professor of Economics, University of Dhaka.
abuahmedecon@yahoo.com
No comments:
Post a Comment