Low interest fuels stock market to perform best globally

Low-interest rate has turned to be a blessing for the stock market as both individual and institutional investors are choosing to park their money in stocks, making Bangladesh market the best globally with the highest gains in indices in August.

The AFC Asia Frontier Fund found that most of its larger markets made good gains in August and Bangladesh market was the best performer globally with a gain of 15.8%.

Asia Frontier Capital Ltd, an investment company based in Hong Kong, manages various funds, namely AFC Asia Frontier Fund, AFC Iraq Fund, AFC Uzbekistan Fund and AFC Vietnam Fund.

A research conducted by AFC Asia Frontier Fund released on August 8 showed that lower interest rate, increasing exports and remittances and the reopening of the economy have led to this rally in the Dhaka Stock Exchange (DSE).

Vietnam witnessed a strong rally with a 10.4% index gain as it has flattened the curve of the second wave of coronavirus cases while Pakistan and Sri Lanka registered gains of 4.7% and 4% respectively on the back of continued positive investor sentiment, according to the research.

Lowest foreign sales in the Bangladesh market among South Asian countries also confirmed investor's confidence in the resilient economy.

During the January-August period, net foreign sales amounted to $90 million in the Bangladesh market when it was $174 million in Sri Lanka, $314 in Vietnam and $350 in Pakistan, according to the research.

However, this does not reflect the real picture because they did not give percentages of foreign holdings in the countries.

The rally is being jointly supported by monetary easing, economic recovery, capital market regulator's moves for good governance alongside increased expectation for a continuation, said Asif Khan, CFA,  a partner at Edge Research and Consulting Ltd.

However, Dr Ahsan H Mansur, executive director at Policy Research Institute, said the market's upward correction was long overdue.

Regulators and policymakers should be cautious so that no overheating takes place in the Bangladesh stock market similar to many developed markets – they are overvalued on the back of easy money from central banks, he pointed out.

He warned that if easy money is channelled to only stocks instead of being invested in the real economy, it will cause a bubble in the market.

Both the experts believe overheating is yet to be a concern for the Bangladesh market as it has been on a long downturn until the May-June period.

Other markets were in a rally before the pandemic, and most of the markets began their moves to recover from Covid-19 shocks ahead of Bangladesh.

Multiple factors, including low interest rate, excess liquidity in the banking sector, implementation of stimulus packages, a decline in sales of saving instruments and undervalued index channelised money to the stock market, helping Bangladesh become the best performer globally, said market insiders.

Increasing fresh stock investment by banks

The implementation of lending rate cap from April shifted both institutional and individual investors to the stock market, the market trend shows.

Banks shy away from lending to the private sector as the 9% lending rate ceased their pricing of loan risk. The squeeze in lending activities left banks with huge excess liquidity amounting to Tk1.39 lakh crore as of June this year.

The interest rates of different tenures of government bonds declined by up to 345 basis points in the last three months due to excess liquidity.

The weighted average real lending rate in Bangladesh is the second lowest among Southeast Asian peer economies after the lending rate cap's implementation.

The real lending rate of Bangladesh came down to 1.9% while it is 3.6% in India and 1.3% in Vietnam, according to data from the Bangladesh Bank.

In this situation, banks seemed to prefer the stock market as their alternate investment platform.

Banks expedited their investment under a special low-cost liquidity support package for stock investment offered by the Bangladesh Bank in February.

The total fresh stock investment under the package increased to Tk370 crore as of Tuesday from Tk130 crore in March.

Moreover, the banks increased their regular portfolio trading to offset loss amid rising indices, which also pushed share prices up, said market insiders.

Telco, bank, pharma, power and engineering sectors lead the market indices, according to a BRAC EPL research, a stock brokerage firm.

The share prices of the banking sector gained 16% in August, according to the DSE.

Individuals turn to park money in stocks too

The implementation of lending rate cap brought down the deposit rate in the market which also encouraged individual investors to invest their money in stocks.

Bangladesh Bank data shows that the real return of deposits was negative 0.96% as of June, which was the second lowest among South Asian countries.

If an individual deposits Tk1 lakh with a bank, they will lose Tk1,041 from the principal amount at the end of the year.

On top of that, if a 10% tax and other service charges are deducted, the loss will go up.

In this situation, individuals are putting their money into stocks, which was reflected in the rise of daily transactions in the stock market.

Daily transactions were between around Tk200 crore and Tk300 crore until July which climbed up to Tk1,000 crore in August, according to the DSE.

The diversion of money to stocks slowed down deposit growth of banks. The growth which was above 11% before the Covid-19 crisis came down to 10% in June, according to the central bank data.

Stimulus package boosts confidence

The implementation of stimulus packages has picked up from July, restoring investors' confidence, said a senior executive of the Bangladesh Bank.

He said loan disbursements under stimulus packages were slow until it got pace from July on the back of relaxing conditions of the package policy by the Bangladesh Bank to smoothen their implementation.

As a result, banks expedited loan disbursements under the packages, helping industries to restart production, which ultimately put a positive impact on stock prices, he added.

Under the Tk20,000 crore package for small and medium-sized enterprises (SMEs), the Bangladesh Bank approved loans amounting to Tk4,100 crore till August.

The approved loans under another Tk30,000 crore package – meant for large industries – also doubled to Tk20,000 crore in August from July's amount, according to data from the central bank.

Tight rules moving money to stocks

The government tightened the rules relating to investment in saving instruments in order to facilitate small investors. As a result, big investors are now moving away from investing in saving instruments, causing fall in sales.

Sales of saving instruments fell by more than 70% in the last fiscal year from the previous fiscal year, according to central bank data.

In the budget for the current fiscal year, the government slashed its borrowing target from saving tools by 26%.

Amid this situation, many big investors are also channelling money to the stock market, said market insiders.

Since July 1, 2019, the government has imposed a 10% source tax on profits from investments of more than Tk5 lakh in savings certificates. The government has made a provision of tax identification numbers mandatory for investments.

Rising confidence in economy

BRAC EPL Stock Brokerage & BRAC EPL Research said Bangladesh's economy was under tremendous pressure due to an extended shutdown early this year.

Export and import activities fell drastically, but remittance inflow was strong. Now, the country is seeing return to normalcy in the economy as apparel orders are flowing in again and remittance is keeping momentum.

Foreign exchange reserve currently stands at $39 billion, which is the highest ever amount. With stimulus packages to the tune of more than $12 billion and expansionary monetary policy, the country's economy is picking up at a healthy pace.

As the market interest rate has gone down drastically (good banks are offering less than 6% on fixed deposit receipts), the investors are taking a position in the undervalued stock market in the hope of getting a higher return, according to the research.