Bangladesh stock market-Understanding the trends
By-Toufique Hossain
Financial Express, 30 May 2013
It is important to understand the trend of a stock market before making any investment decision.
There are some key statistical measures that help understand the trend. Efforts have been made
here to analyse data by adopting those measures to better understand the trend of the capital
market in Bangladesh. The statistical measures include growth percentage, category-wise share
performance and trend equations like price/earning (PE) ratio, initial public offering (IPO)
scenario, fund-raising, turnover and market capitalisation and movement of the General Index of
Dhaka Stock Exchange (DSE). They are very important to forecast the future course of the
market and its behavioural pattern. In evaluating the capital market performance, both the
theoretical and analytical aspects of the market have been emphasized here.
The DSE is the premier bourse of the country. So the performance analysis of the capital market
in Bangladesh is mainly based on the premier bourse.
The ratio of market cap to GDP growth rate: If we look at the graph 1, we see the ratio of market
capitalisation to GDP growth rate headed skyward suddenly in the fiscal year (FY) 2009-10. The
graph shows the DSE growth performance over a period of ten years from FY 2003- FY 2013 in
terms of GDP growth rate and the market capitalisation-GDP ratio. During the period from 200304 to 2008-09 both the indicators were very low. The market cap-GDP ratio spiked in FY 200910 and then it decreased gradually during the period between FY 2011-12 and FY 2012-13. The
upward movement of the ratio of market capitalisation to GDP growth rate was not a healthy
sign. We all know what happened afterward-the marker headed for the biggest fall in its history
at the fag end of 2010 and it continued into 2011.
Trading quantity and trading value: The Graph 2 shows the DSE growth in terms of both trading
value and trading quantity. Though the indicators went up steadily in the year 2009 and reached
the peak in 2010, they again fell during the period between 2011 and 2012. These two indicators
show that the market suffered in terms of both trading quantity and trading value in the absence
of good securities. So steps should be taken to make sure that good securities can get listed with
the DSE.
IPO scenario: In the Graph-3 if we look at the primary or basic market, we see the market
condition was not good enough during the period of 2005 to 2008. Then it slightly improved
through 2009, the golden period. In 2009 eighteen companies floated IPOs (initial public
offerings) worth Tk 8,917 million. In 2010 also, eighteen companies floated IPOs. But the value
spiked magically to Tk 11,861 million. So it can be surmised that something unusual might have
happened in 2010.
Then again in 2011 nineteen companies floated IPOs worth Tk 19,914 million. In 2012 the
number of IPOs declined to seventeen and the value fell to Tk 12,081 million. So it is clear that
the IPO market began to see a downward trend in 2012 compared to the previous year.
Market cap and turnover: In the Graph 4 we see the market capitalisation and turnover flactuated
heavily. These two indicators went up almost proportionately during both the pre-crash and postcrash periods. In 2010 they reached their peak. Thus they indicate the market volatility.
Category-wise analysis: The Graph 5 shows the performance of four catogories of shares over a
period of five years in terms of turnover, market capitalisation and price/earning ratio. These
factors are very crucial for assessing the stock market performance.
As in 2010, the turnover, market capitalisation and the P/E ratio for A-category shares were 29
per cent, 93 per cent and 29 per cent respectively. The figures for B-category shares were 119
per cent, 0.28 per cent and 119 per cent and for N-category shares 118 per cent, 3 per cent and
118 per cent. Finally, the figures for Z-category shares were 24.15 per cent, 3.26 per cent and 24
per cent. The standard P/E ratio worldwide is 10 per cent. It can be allowed to go up to 12 per
cent, not beyond that. But on the DSE the P/E ratio for every category of shares was far beyond
the standard level. The scenario clearly indicates that in 2010 the stock market was overheated.
DSE Gen Index vs market cap: The Graph 6 shows the DSE performance in terms of market
capitalisation and the DSE General Index movement. Both highly fluctuated from year to year.
Let us have a look especially at the two crashing periods-one in 1996 and another in 2010. In
1996 the index was high, though the market cap was low. As is seen in the Graph-6, the index of
1996 dominates the market cap of the same year.
On the other hand, though the market cap increased many times in 2010, the index did not rise
proportionately. In the graph-6 we see how the market cap of 2010 dominates the index of the
same year. What happened in 1996 was just opposite in 2010. None of the trends in those two
years is good for the market. On the contrary, the market trend, as seen in the graph, during
2000-2004 gives a healthy sign.
Fund raised through bonus shares, rights shares and IPOs: In the Graph 7 we see during the
market crash, especially in 2010, the notable problem of the DSE was it could not generate
ample funds. In 2009 bonus shares worth Tk 18,534 million were issued. Bonus shares issued in
2010 were worth Tk 31,205 million, up by Tk 13,671 million from that of the previous year. Still
the market crash happened. If the money raised was utilised for the market development, the
crash might not happen. Actually, IPOs and issuance of bonus and rights shares are allowed to
raise funds during any crisis period.
However, bonus shares issued in 2011 were worth Tk 51,097 million and the figure in 2012
declined to Tk 47,973 million. It was thought 2012 would be a prospective year, but it did not
happen. So it is easily surmised that the funds raised through IPOs and issuance of bonus and
rights shares were not utilised for the market development.
Formation of bubble: In the Graph 8 we see movement of the then all three DSE indexes during
the time of the market crash, especially in 2010. In 2009 the DSE General Index was at 4,535
points. In 2010 it just doubled to 8,290 points leading to formation of a bubble. The other
indexes also saw the similar trend. All bubbles burst sooner or later. This DSE bubble also burst.
All the indexes kept falling in the next consecutive years-2011 and 2012.
The above indicators show that the market was never in a good mode. Continuous
inconsistencies and irregularities left the local share market vulnerable to shocks on different
fronts over the years. So, it is important to know the trends by analysing charts and historical
data that help us have a better understanding of the existing market situation and its future
movement.
The writer is a stock market analyst and young professional at BRAC International Finance.
toufique2010@gmail.com