Faces of a depressed market

At the end of fiscal year 2019-20, frustrated investors at the Dhaka Stock Exchange (DSE) are looking back to all the deteriorating capital market indicators such as stock pricing, arrival of new stocks or market activities.

Amid the horrible faces of the extremely depressed market, the premier bourse has only one good thing to offer – some cheap stocks. 

If there is no further headwind, the attractive price level of a large number of stocks might emerge as the ray of hope in coming days, believe experts.  

Pricing 

From the beginning of July 2019 to the end of June 2020, the stock market in Dhaka was nothing but a story of fall.

Of the 358 listed tradable securities, DSE witnessed only 29 to end in green, thanks to the devastated investors' confidence, money market imbalance, turbulent banking sector and hurdled corporate earnings. 

The market had already been struggling with its own problems even before the novel coronavirus broke out in the last half of the just past fiscal year.

However, following a two-month economic shutdown, including the market trading, the key benchmarks at the DSE have lost 25-31 percent over a year. 

Foreigners' sale off, concentrated in blue chip stocks, made the blue chip index DS30 the biggest loser. 

Market capitalisation at the DSE fell by nearly 22 percent to Tk3.12 lakh crore to worsen the GDP-to-market capitalisation ratio that reflects how underdeveloped the capital market is. 

Market activities 

Due to the 66-day shutdown, the market had 203 trading days in the last fiscal year while the market was open for 238 days in the previous year. 

The ongoing fall restriction through the imposed floor price mechanism in individual stocks further dried the market up.

At the end of the fiscal year, turnover at the DSE fell by 46.63 percent while the number of shares or units traded dropped by 42.4 percent.

Average daily turnover at the DSE fell below Tk382 crore, from Tk614 crore a year ago.  

The anemic trading activities pushed market intermediaries into a tight situation and ignited job losses. 

Capital accumulation 

The primary market was a hotcake till 2018. But following a serious wake-up call to stop poor performing businesses from entering the bourses alongside a number of allegations of manipulation, the securities regulator turned too conservative to approve initial public offerings. 

In 2019-20, the IPO market went so dull that only three companies and a corporate bond entered the market to collect less than Tk300 crore. 

The primary market was never so dull since at least the mid-2000s. 

Record low price against earnings 

At the end of June, the DSE posted an average price-to-earnings (PE) ratio of 9.31. The ratio was 14.25 even a year ago. 

PE ratio reflects how many years a stock might take to pay back a secondary market investor from its annual profit alone. The lower the ratio means the stock is believed to be cheaper. 

DSE database since the mid-2000s reveals that stocks at the bourse were never so cheap. 

Shakil Rizvi, a director at the DSE, believes such low PE usually attracts investors from home and abroad and often triggers a turnaround at some point. 

All the equity analysts are yet to buy the low PE offers as they are still not sure how deep the pandemic is biting on the companies' profits. 

They know if profits drop drastically, the same stocks at the same price will witness a higher PE ratio. 

The uncertainty coupled with fear amid virtually no inflow of fresh capital seems still highlighting the downside. 

Majority of the stocks are not receiving spontaneous buy orders at the existing floor price.  

CFA Charter Holder Abdul Muntakim, chief executive officer of merchant bank PLFS Investments Ltd, believes that the market has already overreacted in the case of a large number of stocks. 

"The tough situation is impacting company fundamentals for sure, but I feel a large number of stocks have already faced a bigger blow in the market compared to what they would face in their business ultimately," he added. 

Earnings may drop, dividends may fall in tough days. But a number of companies should find their way to comeback, Muntakim believes. 

If a company succeeds to do so and its stock price is too cheap right now, investment may prove profitable in future. One must analyse things seriously, said the investment professional. 

"The market really lacks fund inflow and we are seriously looking for positive developments in this regard," he added.