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Disgruntled investors after record fall in stock market.
Disgruntled investors after record fall in stock market.

The rot started many months ago; on Sunday the market finally started crumbling. Between Sunday and Monday, Bangladesh stock market lost more than 15 percent. For a small economy, a loss of wealth of almost $7.5 billion, even on paper, is remarkable. Given the fact that many small investors flocked to the market lured by easy profit, the ripple effects would be widespread.

In 2010 alone, the market appreciated by 100 percent. In the three years (207-2010), the average return was over 50 percent. The market appreciated so fast lately that the inactivity during the first part of the decade was overshadowed by the performance of the last three years, resulting in an average annual return of over 30 percent during this decade. Despite the current corrections, the magnitude of the return is still stupendous. In other words, nothing to feel sorry about the last two days’ loss. After all in a market based laissez-faire economy, nobody has the right to determine how others invest on their own free will.

However, last two years have brought in clueless investors in the market. These are investors with limited capital, limited knowledge and limited risk-taking capacity. Most diverted their funds from essential or productive activities. Most left their day jobs to ponder on the market. In other words, these people had no business partaking in this risky game. We shall keep hearing about the plight of the retired government official in the days to come.

In other places, I have tried to explain how the speculative bubble started in the first place. It was a confluence of factors, including lack of investment opportunities in the real sector, excessive supply of money and proliferation of trading facilities. Finally, banks’ reckless participation in the market exacerbated the situation. What is pathetic is the role or lack thereof of the central bank. In keeping exchange rates fixed and favourable to exporters, it increased money supply without any care for inflation or asset price bubbles. What is more irresponsible is to let banks leave their traditional business and frolic freely in the stock market. Only in the last six months did the central bank notice that something was amiss. Only in the last three months did it actively enforce the rules limiting stock market participation by banks. The last central bank governor was too timid to enforce these rules against the veiled threat and the current one proved too populist to do the same. Would anyone care to comment why margin lending is regulated by the SEC and not by the central bank?

I think the point is not missed by the current government that the stock market crash of 1996 was considered one of the failures of the then government, which precipitated its fall. I would expect them, rightly, to look for the sources of this crash. I would ask them to look at the right places, and not target phantoms such as “speculators” or “rumour mongers”. Rather look for the SEC officials that changed rules (especially on margin rules) every few minutes either not knowing what to do or knowing too well how inside information works. Also, it is worth knowing what SEC officials in connivance with the culprits of the last crash were involved in overpricing IPOs, especially mutual funds. Also why and who randomly changed rules regarding mutual funds trading to protect their own investments but misguided the rest of the market. It is easy to find out, with available trade records of the DSE, who bought in one name and sold in another name, thus manipulating the market. Look for names such as Chittagong Vegetable and CMC Kamal, and determine what factors contributed their meteoric rise (5000 percent) despite those being crappy businesses.

In order to achieve double digit growth, we needed to raise our savings/investment rates by at least 10 percent of the GDP, from 25 percent to 35 percent. Capital markets could be a very good source for that.

It appears as in everything else, we killed the golden goose.

ANM Hamdullah is a retired banker.

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