The prime bourse has fluctuated wildly so far this year after a depressing 2018. Investors are looking for clues about what 2019, the post-election year, will bring.
Stock prices plunged about 500 points or over 8 percent, as measured by the DSEX, erasing over Tk 8 billion in value while the volume of trade dropped sharply by more than 70 percent in less than 10 weeks after they peaked on Jan 24.
In just three weeks after the election, the index surged over 7 percent, adding Tk 4 trillion to the market capitalisation and sending the volume of trade steeply up by a whopping 126 percent.
To shore up the market, the state-owned Investment Corporation of Bangladesh and the Dhaka Stock Exchange had publicly announced that they will pump funds. And the regulator BSEC promised to support the two institutions.
The ICB was expected to inject fund worth Tk 20 billion and the DSE Tk 9.62 billion gained from its Chinese strategic partner by selling the bourse’s 25 percent stake. Soon after the announcement, the market moved briefly higher.
So, what are the jitters in the market right now, keeping investors on the sidelines after three months of extreme volatility?
The underlying economy of the country is relatively sound, raising hopes about the capital markets that the recent selling spree will burn itself out and that stocks will resume their record-setting climb. But the investors must weigh up the risk that the plunge, the worst in recent days, could be the start of something more sinister.
Many analysts point out that the forces that pushed the key index more than 13 percent down in 2018 are still at play. The higher interest rate poses a risk to corporate profits and investors’ appetite for stocks.
The liquidity squeeze in the banking sector, a sudden increase in sponsor share sales, higher alternative investment returns and margin call (a demand by a broker that an investor deposits further cash to cover possible losses) may contribute to the possible fall of the market.
But the bottom line is that the manipulators are still on the prowl to take advantage of a weak market regulator.
Price manipulation can happen pretty easily on bourses, and it takes place more often than we might think. And doing so in a perfectly legitimate way is nothing difficult, depending on how much trading power you have.
Individual stock investors don’t have ready access to these types of techniques and, consequently, they often end up on the losing end of these schemes. In this situation, a little knowledge can get the investors a very long way.
As the big investor dumps stocks onto the market, prices will naturally begin to plummet. Other investors might panic, and so they begin to unload the stock as well. As a result, the price continues to slide.
At some point, the institutional investor decides that it’s high time to jump back in and begins an aggressive buying scheme. Soon other investors notice that prices have started to go up again, and they also begin to buy up the stocks. This demand pushes the prices up higher. It might begin again when the price hits a very high price, and it often does, creating a cycle.
Big institutional investors, because of their enough purchasing power, have the ability to drive prices down and then buy back into the stock at a low price. These investors ride that price up as others join the rally, and then pocket a hefty profit as a result.
This is exactly what’s happening in the country’s stock markets.
Let’s pick up a stock for instance. Amid the dull volume of trade, some particular issues abnormally went up and then saw a freefall. In the case of Sonar Bangla Insurance, share prices unusually soared 366 percent to nearly Tk 70 per issue in less than two months and then started to fall.
Like Sonar Bangla, stock prices of United Insurance and Eastern Insurance went up abnormally during the same period.
Out of this falls and rises, some made windfall profits while some, mostly retailers, burnt their fingers. Who poured money on this particular stock and why? No answers were found.
For the same reason, in February this year the market regulator BSEC fined some officials for jacking up share prices of Padma Life Insurance, Monno Jute Stafflers, Monno Ceramic Industries, Queen South Textile Mills, Eastern Lubricants and Alif Industries.
The penalty was Tk 5 million for the mastermind. Stock price gains are on average are far bigger than the financial penalties imposed by the regulators. Such type of manipulation is nothing new in our stock markets. The BSEC continued to fine and manipulators continued to do so. This has been happening for long like it knows no end.
“The regulator should keep a close eye on the market as some may try to fish in troubled waters,” AB Mirza Azizul Islam, a former chairman of the BSEC, told me.
Higher interest rates might also have weighed on stock prices more than anything else in 2018. Though the government continued to push banks and financial institutions to bring down the rates, they still remain high.
Some banks and institutions had to increase deposit rates to attract more funds to meet the advance-to-deposit ratio or ADR that measures loans as percentage of deposits for commercial banks set by the central bank during last year’s liquidity crisis.
“Banks feel liquidity strains. Look at the recent capital machinery import and private sector credit growths. Both declined. Liquidity shortages triggered by a deceleration in banking activity are a potential risk to the economy,” said Islam who was finance adviser to the Fakhruddin Ahmed-led caretaker government. “This might also put damper on investors.”
The outlook for the share market is clearly not so bright. The investors must watch the market with a great deal of caution before making a move.