ANM Hamidullah

Rot in the stock market

January 10, 2011
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.

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ANM Hamdullah is a retired banker.

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10 Responses to “ Rot in the stock market ”

  1. ishtiak rahman on January 16, 2011 at 10:09 am

    As far as I remember, chairman of SEC was pleading not to invest with lifetime savings. He also urged to learn some basics before entering the market.

    If you want to lose your money others will take it. No point in blaming others.

  2. Makshum on January 13, 2011 at 4:55 am

    Thanks to Mr. Hamdullah for this bold article. I believe everyone will agree with this article in line with the comments that finding out the culprits involved in making money unethically is not a difficult job. Just investigate the trades for Mutual Funds, CTG veg or CMC kamal and some other companies even like the new entry – United Air.

    After the Jan 10th incident, we can see that every entity is just blaming the other one and I feel that this is one more trick to deceive general people. If the government really wants to prove their worth, they should take stern action against these wrongdoings.

  3. Matiur Rahman on January 12, 2011 at 1:05 am

    People need to be aware of the functions of the central bank and its vital role in the economy. Now the questions remain whether populist approach and partisan political postures by the governor( not a mainstream macro/monetarist economist; perhaps, an economic sociologist)are serving the central bank well with its uniqueness, dignity, autonomy and non-partisanship? Was he the right choice for this job, except political consideration while many experienced and seasoned bankers, and mainstream economists were available for this job? He has no record of mainstream macroeconomic research. He is also lean on research pertaining to poverty alleviation.Too much politicization of money supply and frquent unnecessary policy statements are recipes for economic disasters. Time will tell. Until then, we may have to wait.

  4. Mausd Quader on January 11, 2011 at 7:02 pm

    Mr. Hamdullah

    Thanks for the informative write up. The same thing is published in Facebook by one of my good friends; now I am confused, whose write-up is this?

    Masud Quader

  5. Akhtar Shah on January 11, 2011 at 7:02 pm

    Investigations, Regulations, Rich and influential parties, Conspiracy theory, Regulatory bodies and supply and demand are “article filler” words. I am not being flippant about these!!
    Let’s see what can be done about the “lambs to the slaughter”? The finance minister refers to the small investors as “Unmad”!! In the same breath he tempts (investors) and talks about impending IPO’s as potential juicy investment opportunities.Without a word of warning of potential risks, this is not very responsible.

    A well known basic rule of stock and shares investment for “gamblers” is that, only investment amounts that must never represent ones “life’s worth” or worse still, not borrowed. Stating the obvious, the gamble goes wrong, then it is terminal.

    I clearly see no warnings or notices by the SEC or any media about such safeguards.

    This should be written about , talked about in shows and advertised by the government. In country like BD, hapless gullible investors are being made minced meat by the system and unscrupulous sharks.

  6. Matiur Rahman on January 11, 2011 at 10:53 am

    Seems timely, but inadequate.
    Perhaps, insider trading is one of the problems contributing to this current debacle. Persons/parties involved need to be investigated. Investors (small ones) are unsophisticated. They need to be trained for financial literacy to make rational investment decisions. Stock market is a casino. No one can always make money. Both loss and gain are inherent. If someone always wants to make money in stock market, he/she is dead wrong. Those who cannot tolerate risk and are very much liquidity-constrained must not enter this market. This is just paper loss. Those who can hold for a long time should come out ok. No need to panic.

    Those who invested borrowed and pension money without enough holding capacity will be in deep trouble.

    It is a big mistake on the part of the central bank to let commercial banks heavily invest in stock market by diverting money from directly productive business/economic activities. Perhaps, they profited this time and in 1996 at the cost of small investors by pumping up the market to entice small investors and after they entered the market in herd, banks dumped stocks for abnormal profit. Big businesses are also likely to be involved. They need to be investigated thoroughly and let the chips fall where they may. Only exemplary punishment will help restore market confidence.

    Hot money (very short-term foreign capital inflow) might have contributed to it as well. This also merits thorough investigation.

    Foreign short-term capital is a flighty bird. It enters and exit at short notice.

    Stock prices are the outcomes of demand-supply interactions. Capital inflow from various sources will inflate the prices with no close correlation with economic fundamentals. Prices will go up and down in response to shifts in demand/supply or both. This is normal. Prices cannot rise or fall steadily for eternity. Small investors thought that prices will keep rising and they will be making easy money. This thinking on their part is due to lack of financial literacy.

    Abrupt market nosedive of such magnitude is not just a market correction. We cannot pass on the blame to fancy financial terms, such as, excess speculative bubbles, herd behaviour, momentum investing, irrational exuberance, etc. They will not help restore market confidence.

    This is high time for decisive actions by the Bangladesh Bank, the SEC and the finance ministry. This is time to get serious about business and not to make it light with out-of-context smile. Bangladesh Bank must show its courage by bold actions as a non-partisan unique institution. Populist approach will simply undermine the dignity and autonomy of the central bank. This tsunami is the result of failure to enforce oversight by the regulatory authorities concerned.

    No new regulations should be imposed in haste. They have to be appropriate, timely and optimum. Any quick fix will sow seeds of another catastrophe.

    Didn’t we learn anything from the 1996 debacle?

  7. Kabir Khan on January 11, 2011 at 10:38 am

    A balanced piece. Right on the BB and its two recent governors.

    The BB and its current populist governor also need to share the responsibility, along with the SEC. The governor has been too busy posing for the camera and making unconstructive statements that have very little to do with central banking (such as digital power generation on the top floor of the central bank).

  8. A Reader on January 11, 2011 at 10:36 am

    Our PM said few days ago that Grameen Bank is a blood sucker of poor. But the money that was sucked by AL peoples and ‘friends’ from poor investors through two share crashes (1996 and 2011) will remain unparalleled in the history of Bangladesh.

  9. M.N.Meah on January 11, 2011 at 1:19 am

    Thanks to Mr. ANM Hamdullah for this informative article. I think all concerned who are playing foul with vital national interest should be brought to book. If the govt wish to avoid the wrath of the general public, it should remove all useless and corrupt officials from the strategic positions in SEC, Bangladesh Bank and the ministry of finance.

  10. Mir Md Zahid Hasan on January 10, 2011 at 11:02 pm

    It seems that AL government is making the same mistake again. Stocks can be overpriced but the mechanism to bring it down should be used properly. What they (authority) are doing is taking ineffective decisions which is pathetic.

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