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Saturday, January 22, 2011
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Stockmarket Crash
News Analysis

Stocks: Party is over. What next?

The stockmarket that appeared to be a miracle has now turned into a scourge.

It grew too fast, just in the last two years. The share index trebled, so did market capitalisation. Daily average turnover grew by seven times. It was a market that pulled in tens of thousands of new investors from across the country. Those who were once desperate to make quick bucks from the miracle, are now walking out on the bourses only to save what is left of their investment.

The last two weeks were the most desperate time. The bubble burst, which was inevitable as had been predicted by analysts.

The bubble was not supported by the fundamentals of the real economy, which did not see any major development or change that could influence the stockmarket. The market did not get enough new securities on a par with the influx of liquidity.

Instead, an influx of liquidity from banks and small savers pulled the market to sky high at a time when investment demand in private sectors remained low amid consistent energy crunch and infrastructural bottlenecks.

"The market that touched eight thousand nine hundred points in December last year was irrational," said Mirza Azizul Islam, a former Securities and Exchange Commission chairman also a former finance adviser to a caretaker government.

The latest fall -- 24 percent in index and 19 percent in market capitalisation in just two weeks -- is not only a capital market issue, it will remain a stigma in Awami League-led government's track record. The current predicament conjures up memories of 1996, when the market had crashed last time.

In the past two years, the economy grew between 5.7 percent and 5.8 percent. Investment in the industrial sector was less than expected, as energy crunch and infrastructure bottlenecks kept many entrepreneurs shy in taking up new projects.

This led the banks and financial institutions to invest profusely in stocks. At the same time, there was an influx of small investors -- from university students and jobless people to housewives. They entered the market lured by calls from brokerage houses that opened up branches across the country.

The number of small investors rose to 33 lakh. Nearly a half of them came within the last one year.

Between 2008 and 2010, daily average turnover grew almost seven times to Tk 2,000 crore. In contrast, only 51 new issues including mutual funds were added to the already listed scrips.

The bulk of the fund came from banks directly and indirectly. Loans for industries were diverted to stocks to catch easy money amid slack monitoring by regulators and lenders.

Until August 31 last year, banks' investment in stocks or share-related institutions was Tk 24,000 crore, with a number of those institutions crossing their compliance threshold.

But as the year end neared, banks started to liquidate their investments at a time when Bangladesh Bank tightened its grip on money supply to rein in inflation.

Big individual investors followed suit, resulting in a leak in the ballooning market, and bankruptcy of many small investors.

The market is now suffering from confidence crunch. Panic and hopelessness gripped small investors, as institutional and large individual investors remain on the sidelines with government failing to bring back confidence needed to salvage the sagging market.

The only hope, analysts said, is that the market already might have regained rationality due to the crash.

The latest catastrophe and the massive fall ushers a new optimism of turn around. Prices of many companies' shares are no more irrational.

The index has come down to such a level that it cannot be called irrational anymore, said Mirza Aziz.

"Time has come for the institutional investors to play an active role in the secondary market, as investment at this level is less risky, and there is opportunity for making profit either through dividends or capital gains," he said.

The retail investors also should not be panicked, rather they should invest carefully, he suggested.

Khondaker Golam Moazzem, senior research fellow of the Centre for Policy Dialogue, however said the present volatility may continue, if the real problems are not identified and resolved properly.

"Although it was anticipated that liquidity crunch was the main reason behind the ongoing crisis in the stockmarket, the main problems are structural, managerial and lack of coordination between the money market and capital market," he said.

"The present crisis cannot be solved only through increasing liquidity flow in the secondary market; focusing on the real issues and taking steps accordingly is the main task," he added.

However it is good to see that the market regulator took some measures on Thursday after identifying some irregularities, he said.

He also said time has come to keep a watch on the market regulator to see whether the regulator is running with adequate and capable workforce, and if any mismanagement and irregularities are happening there.

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The market crash was inevitable. It was not a matter of if but when. People were naive to think 80% run-up was realistic. This bubble does not stay within the walls of the exchange but will spill over the real estate and to the next sector and will be devastating. This is just the beginning.

: CT Karim

Why is everybody calling this a crash and asking for government support? Just compare the price of most of the stocks with their fundamentals. It will be seen that still majority of the scrips have P/E way above a rational level indicating the market to be highly overpriced. So to be at a logical level these overpriced stocks need to undergo further correction & government will make a big mistake if they try to artificially prevent this correction from happening

: Learner

Comments

  • Anonymous, USA
    Saturday, January 22, 2011 01:43 AM GMT+06:00 (187 weeks ago)

    The Finance Minister, who also submitted his wealth report, has been honest in admitting the mistakes, but did not elaborate on whose mistakes were they. Will the FM be able to investigate these allegations and will the Ministers and the MPs now submit their wealth reports? It may be too late too soon.

  • Syed Ahmad
    Saturday, January 22, 2011 03:00 AM GMT+06:00 (187 weeks ago)

    Party is over for the common investors not for those big boys who left the party before the mid night bell with all the merriment. It would be a rocket science who manipulated the market and gained how much. There are accounts who made how much money in the last few years. We, the public, know the names of these culprits. Some were at the brink of bankruptcy - using the ill-gotten money from the stock they have not only paid of their debts abut have gone only a buying spree of several business sectors.

  • Saleh-Rahim Ahmed
    Saturday, January 22, 2011 06:34 AM GMT+06:00 (187 weeks ago)

    In the reports news papers writing capital market / investments / small investors etc. Throughout the country those small investors call those aforesaid terminologies as simple as 'share business'! They do think share is a commodity it has face value on the papers some sort of legal purpose only and floor value has to increase every single moment as many times as they do transfer the title deed!

    Very few people know even the real activities and/or core business of the company they buy the shares simply they dont bother because they dont think its an investment in any particular sector of commerce and industries! They do think buying and selling has to make more money, doesnt matter where is the company, what they do what is their present financial status and/or market strength of their products and/or services!

    Even I have found lots of those investors dont know why each and every company name has the word Ltd at the end of their names but dont hesitate to put their hundreds of thousands hard earned money in it! Most of them think one doesn't need to have any expertise to do share business. Government and SEC or DSE/CSE is there to secure their ever increasing money making illogical trade!

  • people
    Saturday, January 22, 2011 10:15 AM GMT+06:00 (187 weeks ago)

    nothing wrong in that 33 lakh people come to market to get profit.the powerful people artificially invited those people in market to make money.

  • Kazi Nasim Ahmed
    Saturday, January 22, 2011 11:50 AM GMT+06:00 (187 weeks ago)

    Your heading is enough to ruin investors confidence.

  • GOPAL PAUL
    Saturday, January 22, 2011 12:53 PM GMT+06:00 (187 weeks ago)

    Actually, the money which is invested in share market donít produce any benefit to the company. Most people hunker after only money. They don't think before investment and they invent without any analysis. This is the fact that makes them, investors, sad when the share price falls.

    Befor investment, investors should analyze the company properly.

    Share market is nothing except gambling.

  • Nowshad
    Saturday, January 22, 2011 01:30 PM GMT+06:00 (187 weeks ago)

    It's now time not to discuss whether the market was too overpriced or not. There are places around the globe where things stay overpriced and those are turned into normal level through systematic measures. For instance, Singapore Property Market. It is now high time to react on this crisis, otherwise it will trigger financial downturn in other sectors, which will even worse than this.


 

 


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