Why stocks on a downward curve

The stock market index has been on a downward trajectory for the past two months, as a brief surge following the August political changeover quickly fizzled out.

For the market plunge, analysts point the finger at a combination of factors, including higher interest rates in the banking sector, forced selling due to margin calls, a series of labour unrest slowing the manufacturing sector and low investor confidence.

The DSEX, the benchmark index of the Dhaka Stock Exchange (DSE), surged 786 points, or 15 percent, within just four days after August 5th of this year. Since then, the main index has plummeted 846 points, or 14 percent, to 5,169 points as of yesterday.

One of the main reasons for the market's decline is the high interest rates offered by banks, according to Md Ashequr Rahman, managing director of Midway Securities.

He said good banks are now offering interest rates above 11 percent for deposits, while treasury rates have also reached historic highs. "This combined effect diverts funds away from stocks, impacting the market negatively."

Besides, the ready-made garment sector faced production disruptions due to labour unrest in September and early October.

This impacted the apparel business and ultimately had a negative effect on the stock market, added Rahman.

According to the managing director of the securities house, the regulator's rush to implement stricter measures to discipline the highly sensitive market also contributed to the plunge amid fragile investor confidence.

He said the regulator should have implemented these measures gradually.

For instance, Rahman believes that the Bangladesh Securities and Exchange Commission (BSEC) should have held dialogues with 27 companies before downgrading them to the Z category.

"If such discussions took place, many of these companies could have made necessary corrections. The number of junk downgradings and their subsequent impact could have been minimised," he commented.

After the fall of the Awami League government, many foreign and institutional investors purchased blue-chip shares at low prices, hoping for major improvements in governance and the overall stock market ecosystem, Rahman added.

Meanwhile, Saiful Islam, president of the DSE Brokers Association (DBA), said, "The primary cause of the recent decline in stock market indices is trigger or forced selling."

Islam said that many margin accounts, a type of brokerage account where investors borrow money from the broker-dealer to purchase securities using the account as collateral, have become problematic in the stock market.

This issue began in 2011 when trigger sales were deferred, leading to financial distress for many lenders.

For the past 15 years, brokers and merchant banks were prevented from executing trigger sales. However, they are now clearing their books by selling shares, anticipating stricter provisioning requirements that were previously waived, he added.

Islam said brokers should not be barred from executing trigger sales, as it negatively impacts both investors and intermediaries.

As of the end of 2023, the outstanding negative equity against margin loans in the country's capital market stood at Tk 6,630 crore. Around 87 organisations, including brokers and merchant banks, continue to bear this burden.

According to the regulations, negative equity should not have occurred, as lenders were obligated to sell assets in margin accounts before their market value fell below the borrowed amount. However, after the market collapses of 2020 and 2011, the regulator verbally instructed lenders to refrain from conducting sales in margin accounts.

This incorrect regulatory guidance ultimately led to the accumulation of negative equity, initially exceeding Tk 15,000 crore and decreasing to Tk 8,100 crore by December 2020.

Consequently, the stock market index has suffered, as intermediaries are now unable to provide adequate support to the market. DBA President Islam said nearly 50 percent of stockbrokers and merchant banks are insolvent due to continuous losses.

Islam, who is also a director of Brac EPL Stock Brokerage, mentioned that foreign investors have been hesitant to invest in recent weeks, observing 7-8 banks are going through "a soft bankruptcy".

In this situation, foreign investors are waiting but not withdrawing fund as they have belief on the existing government that the economy will rebound, he said.

To attract more local investors to the market, Islam suggested that stock market leaders must instill confidence among general investors in the regulator's ability to make sound decisions and maintain consistency.

Meanwhile, Shahidul Islam, chief executive officer of VIPB Asset Management, said the political and economic situation has improved since early August when the market experienced a rapid rise after the fall of the previous government.

Therefore, he considered the recent decline in the share prices of good companies to be "irrational".

'In my opinion, the current situation is not worse than it was two months ago, so I don't see any compelling reason for the decline in well-performing companies," he commented.

Islam added that around 50 percent of listed companies should not have been allowed to raise funds from the public due to their poor performance. Moreover, these companies require adjustments and their decline is not unexpected.