torun vai assnmnt

8/3/2019 Torun vai assnmnt

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A section of angry investors again took to the streets at Motijheel in the city Sunday

as the Dhaka Stock Exchange (DSE) experienced yet another massive fall despite

announcement of the stock market rejuvenation package by the securities

regulator.

The Securities and Exchange Commission (SEC) unveiled the stock marketrejuvenation package Wednesday.

"But all positive steps to rejuvenate the capital market are yet to leave positive

impact on the market. Rather, the falling trend has disappointed many investors,"

brokers said.

At the end of four-hour trading, the DSE General Index (DGEN) plunged 308.12

points or 5.73 per cent on the day to close at 5,065.17 while the turnover value

stood at Tk 4.51 billion.

The losers thrashed the gainers as out of 254 issues traded, only seven advanced

and 247 declined.

The frustrated investors came out of different brokerage houses and gathered in

front of the DSE main gate at about 2:00 pm when the DGEN fell by more than 200

points.

They chanted slogans against the DSE president, the Bangladesh Bank governor

and the finance minister for their failure to bring back stability in the market.

The leaders of the Bangladesh Share Investors Unity Council (BSIUC) staged ademonstration and brought out a procession protesting against the share price fall.

They also threatened to organise a 'grand rally' on December 7 in front of the DSE,

if the government fails to bring back normalcy in the stock market within 72 hours.

The investors alleged that some big market players and gamblers might have a role

behind the fall in share prices and urged the government to take effective steps

immediately.

They also urged the SEC to investigate whether foul players are involved in theunusual share price fall and save the capital market from the claws of vested

quarters.

BSIUC President AKM Mizan-Ur-Rashid Chowdhury said, "Though the government

announced a 21-point stock market rejuvenation package to stablise the market, a

group of vested quarters are trying to make the market volatile and buy shares at a

lower price."


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Later, they brought out a procession which marched from the DSE office to Shapla

Square.

However, vehicular movement from Shapla Square to Ittefaq intersection was

normal as additional police personnel cordoned off the whole area and brought thesituation under control without any untoward incidents.

Yawer Sayeed, managing director and CEO of AIMS of Bangladesh, an asset

management company, told the FE, "Though the government has taken some

positive steps, the retail investors do not show their patience."

"The retail investors should behave rationally as the government took all positive

steps to stablise the market," said Mr Sayeed.

"The measures the government has taken will take some time to come into effect;

it's a reality. But our investors do not keep patience and are panicked which is very

unfortunate," commented Mr Sayeed.

AB Mirza Azizul Islam, former finance adviser to the caretaker government, told the

FE: "There is no valid reason for market fall as the government took a series of

positive steps to stablise the market."

The investors should be rational and make their investment in fundamentally strong

shares, Mr Islam, also a former chairman of the SEC, said.

Institutional investors were almost inactive ahead of wrapping up their accounts inthe year-end closing which was also a cause for the market fall, he said.

However, he said, the banks may go for fresh investment in January-February.

"Relaxation of various rules in the rescue package to encourage greater

participation of banks in the market seemingly did not materialise as yet with the

trade value dipping below Tk 5.0 billion," said a stock broker.

On the contrary, a combination of aggressive profit-taking and tendency of traders

to stay in the safe zone amidst uncertainty relating to the country's macro-economic condition led to the massive fall, he added.


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Dhaka stocks dipped for the third straight day on Monday amid street protests of retail investorswho accused institutional investors and the market regulator of not making sincere efforts to

implement the measures of the market stimulus package.

The benchmark general index of Dhaka Stock Exchange, or DGEN, lost 2.12 per cent, or 109.55

points to close the day at 5,051.67 points. The DGEN lost 107 points in the previous two tradingsessions.

On December 5 last year, the DGEN reached its highest-ever level of 8,918.51 points with a

record turnover of Tk 3,249.57 crore. In the one year since then the DGEN had shed 3,867points, despite listing of a number of companies with the bourse.

On Monday, the turnover of the bourse inched up to Tk 223.22 crore from that of Tk 210.20crore on the previous day.

The day saw aggrieved investors taking to the street protesting at the relentless fall in share

prices and blaming that the Securities and Exchange Commission and other stakeholders were

not sincere about implementing the measures of the market bailout package.

At around 2:00pm they gathered in front of the DSE building at Motijheel and formed a human

chain blocking the road. They chanted slogans against the SEC, DSE, Bangladesh Bank, and themarket drivers for not keeping their promises to stabilise the market.

Before staging the street demonstration, retail investors under the banner of Bangladesh CapitalMarket Investors Council held a press briefing.

In the briefing they placed a 10-point set of demands including reducing the time for the

sponsors of listed companies to fulfil their shareholding requirement from six months to one

month, clarification from the SEC of the reason for recently starting to run the ticker stockinvestment is risky on television channels, and waiving the margin loan interests of retail

investors for the past one year.

Market operators said investors were becoming panicky again seeing no positive impact of the

stimulus package announced by the SEC late last month for the stock market that had beendepressed for the past 11 months.

The package is aimed at increasing the liquidity supply to the market by offering the institutional

investors, especially the banks, some incentives. But, due to their year closing settlement in


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December, banks could not increase their participation in share trading and that has kept the

turnover of the bourse at a significantly low level, they said.

The news that a International Monetary Fund delegation is due to arrive in Dhaka shortly alsoholds the banks from increasing their participation in stock trading as the international lending

agency could suggest some strategic change to the central banks policy, they said.

The market operators also said that the SECs silence about its directive regarding the sponsors

shareholding requirement that gave rise to an intense confusion in the market also fuelled panicamong the short-term investors.

The SEC in a directive said sponsors/directors of the listed companies must jointly hold 30 per

cent shares of their own companies, adding that those having less than the required percentage of

stakes should increase it in the next six months.

The directive conflicts with SECs insider trading rule that bars share transaction of

sponsors/directors of the listed companies from two months prior to the submission of theaudited financial reports of the companies and their approval.

Of the 246 issues traded on Monday, 24 advanced, 213 declined, and nine remained unchanged.


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Behind the Scenes The Stock Market Saga

On January 9, 2011 the benchmark index of the Dhaka Stock Exchange (DSE) suffered thesteepest ever single-day fall in the bourse's 55-year history. The DSE General Index (DGEN)

plunged by 600 points, and all indices fell nearly 8 percent in the wake of panic-sales. Breaking

the previous day's record, on January 10, DGEN shed 660 points or 9.25 percent between 11 amand 11:50 am. The capital market was shut; small investors turned vandalistic; and the business

district of Motijheel was transformed into a battlefield between protesters and law-enforcers.

Despite the measures taken by the regulatory commissions, people suffered major financial loss

and worse than that, many lost confidence in the stock market. After the big boom in 2010, whatcaused the disasters witnessed during the past one and a half months? How secure is the

securities market?

..................................................................................................................................................

AANTAKI RAISA

The recent market collapse was not a one-day event. Bangladesh stock index marked 80 percent

growth in the year of 2010. The bull run, however, faced its first halt in December 2010. On

December 8 DGEN suffered the third highest single-day plunge since 2001 losing 185.53 pointsor 2.12 percent. Eleven days later on December 19, DSE suffered its biggest crash, of course up

until then, as the index nosedived by 551 points or 6.72 percent at the close of a four-hourtrading session. The raging bull was finally tamed on back-to-back record plunges on January 9

and 10. The upheaval continued as the DGEN, after the nosedives, took a high jump rising morethan 15 percent which was the highest one-day spike ever a rebounding record. To understand

what actually triggered the Sturm und Drang in the stock market one has to go back to the story

behind the rise of the stocks and then come to understanding the falls.

Pre-December 8: The Expansion Epoch

2010 was considered a boon year for investors, although a record fall in December created

massive panic among those who had put their money in stocks. There was hardly any investor

who made losses in 2010. The stock market witnessed a manifold boom the price index,turnover, market capitalisation and its ratio to GDP (gross domestic product), and the number of

new arrivals both in terms of issues and investors. The Dhaka market ranked third globally in

terms of performance, according to an analysis of LankaBangla Securities.

Analysing the reasons behind the upsurge, the former CEO of the DSE Professor SalahuddinAhmed Khan, also a teacher at the Department of Finance of Dhaka University says that the

reasons are quite simple and logical. The country had been in a stagnating position in terms of


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investment for the last few years. Initially the military junta caused a halt in investment, followed

by a lack of power and gas supply that forced the government to stop new connections to any end

users.

The investors turn vandalistic as the DSE index declines at a record rate. PHOTO: STAR

FILE

Consequently, in a country having more than 32 percent national savings and poor state of

investment, a lower rate of nominal interest rate, negative real rate of interest rate encouragedmany new investors to the market. Such new entry was also supported by easier access to the

market due to branch expansion by the brokers. Meanwhile, financial institutions also found that,

due to lack of business opportunities they were being burdened with huge amounts of excessliquidity. The cost of bearing the extra liquidity could not be utilised in alternative investment

avenues where the securities market ushered the path for fund deployment. During this time, as

the real investment scenario was unclear, so flows of new securities in the form of Initial PublicOfferings (IPOs) were also quite scanty. To add to the misery of the market, the government

imposed some unnecessary restrictions on the IPOs causing the flow to slow down further. The

restrictions were partially lifted by November.

Another problem was caused by poor monitoring and market surveillance which resulted inabnormal price behaviour for many securities, especially for those securities where free float

shares are few or the company is very small and so an imperfect market situation enabled the

prices to rise significantly. All these factors caused the prices of most of the listed stocks atDSE/CSE to reach an abnormally high level.


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An inside trader in the DSE, preferring anonymity, informs that during the recession of 2009-

2010, the banks in Bangladesh had a lot of idle money in reserve. Bluntly speaking, when the

banks had huge monetary reserves, acquaintances of the bank officials and other people as well,took bank loans to invest them in the share market. This brought an overflow of liquidity in the

market. I saw the price of a share increase by Tk 40 in one day whereas it wouldn't have

increased by Tk 3-4 in a normal market, he says.

Due to the opportunity of making huge profits, 1.5 million new investors were investing in thestock market in 2010. According to Centre for Policy Dialogue's (CPD) analysis, the total

number of beneficiary owners' (BO) account holders was 3.21 million on December 20 last year,

which was 1.25 million in the same month a year before. This number increased by 154 percentin 2010. The opening of brokerage houses at the district level (238 brokerage houses of DSE

opened 590 branches at 32 districts), arranging a countrywide 'share mela (fair)' and introducing

interest-based trading operation, easy access to market information, were some of the factorsidentified by the CPD that accelerated the flow of investors.

December 8, 2010- January 11, 2011: The Big Crunch

The booming bubble finally burst, the bull run finally

stopped; on December 8 of 2010 with the third highest

plummet since 2001, the DGEN closed at 8585.88 witha loss of 185.53 points. That was just the beginning; on

December 19, the DSE witnessed the steepest till date

single-day fall 551 points or 6.72 percent to 7654.41,beating the previous record fall of 3.32 per cent or

284.78 points, set just one week back on December 12.

The down slope of the index continued till January 10,

2011, with frequent record sets and breaks. Accordingto Professor Salahuddin Ahmed Khan, since in a market

environment, prices cannot remain very high for a

prolonged period, the downward slide was quite predictable. The rate of decline was basicallydue to the nervous state of the market participants. Well, no divine order triggered the continuous

plunges in the stock market. A series of events, actually, made it quite inevitable.

On December 1, the Central Bank sent 50 teams on surprise visits to different bank branches inDhaka and Chittagong after it received complaints that the banks were investing in the stock

market from their reserves to make profit. Some banks were in fact found involved in such

irregularities. During that time, the daily transaction in the share market was on an average of Tk

2000 crore and sometimes even Tk 3000 crore, which was double compared to that of theprevious year (2009).

The DSE Index grew almost 2500 point without any major price correction by December 2010.

To bring the ever increasing price of shares in the market under control, both Bangladesh Bank

(BB) and Security and Exchange Commission (SEC) had sent different directives; BangladeshBank initiated the withdrawal of illegally invested industrial loans from the market by December

31, 2010 and raised the Cash Reserve Requirement (CRR) and statutory liquidity requirement

The number of BO account holders

increased to 3.25 million by

December 2010 as the stock marketbooms. Photo: zahedul i khan


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(SLR) both to 6 percent and 19 percent respectively to safeguard the interest of the depositors.

According to Sharif Mohammad Kibria, an employee at a renowned merchant bank this might be

one of the reasons to blame for the recent fall of the market as it took away at least 2000 crorehard cash from the money market resulting in less capacity of investment. According to Abu

Nayeem Md Anuruzzaman, another employee at the same bank, though former SEC member

Monsur Alam's two directives netting or adjustment facilities (Sell before buy), and en-cashingof cheques submitted by investors against their share purchase orders were blamed to influence

the index slide in December, they were, in fact, lawful and did not attribute to the liquid crisis.

The central bank circular issued on November 28, 2010 asked banks to adjust all loans,amounting Tk 10 million and above, that have been diverted to areas other than the purposes

mentioned in the loan applications by December 15. This surely put the banks in trouble as a lot

of that money was invested in the share market. As a result, banks started selling shares and

withdrawing money from the stock market. This was the beginning of the price-slides inDecember. To tackle the disaster and assure the panicked investors the central bank extended the

time limit by one month for the banks for submission of the list of loans to January 15, 2011. The

commercial banks were instructed to adjust such loan portfolios by February 15, 2011 instead of

January 15 to ease the pressure on the money market. The securities regulator increased themargin loan ratio from 1:1 to 1:1.5 and then to 1:2. SEC also restored normal trading of

Grameenphone (GP) and Marico, suspended the Net Asset Value (NAV) based margin loancalculation and execution of order relating to increased margin deposit by members of the

bourses.

But that did not prevent the fall. After consecutive days of index decline, the stock market

suffered from record-breaking disasters in January. According to a DSE insider, who preferred toremain unnamed, as it was the financial institutions' year closing, they had to pull off money

invested in the market for balance purposes and as a result the banks were neither able to provide

the 1:1.5 margin loans to the retail investors. This event caused less investment from the retail

side as well. With the butterfly effect, the stock market headed towards a liquidity crunch. Theliquidity crisis in the money market was one of the key factors behind the continuous slide in

share prices and turnover. Like most of the market analysts, the anonymous DSE insider blamed

price-correction and price re-adjustment of the financial institution stocks, which were overexposed in the capital market for drop in share prices. Along with the panicked investors who

started selling shares after losing confidence in the market, the anonymous insider suspects that

some syndicates created the unusual sell pressure, which would help them to purchase shares atlow rates. You see, the way the share prices were increasing last year, it would have become

impossible to play the game for the syndicates at such high rates. Hence they wanted to decrease

the rate and the liquidity crisis would help them to force price corrections, he adds.

January 11- January 18:

On January 11, 2011, reversing the trend of the previous few days, DSE index ascended with a

record gain of 15 percent. The DGEN stood at 7,512 points at the closing of the day's trading,

recovering 1,012 of the 1,235 points lost on the preceding two days. This magic jump was not

due to any divine intervention either. A stockbroker, again preferring to be anonymous says:After the sharp and continuous falls on January 10 and 11, the government unofficially

prohibited the institutions, especially the banks to sell any share. And there were few institutional


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buyers who backed up the market. On this issue, Professor Salahuddin Ahmed Khan says,

January 11, 2011 was the reversal of the previous day. On January 10, the nervous syndrome

led to panic sales. The government and especially the Prime Minister's instruction to BangladeshBank to ensure that flow of funds to the market will be easier again brought back investors'

confidence for which they wanted to recap the loss they sustained in the previous days. That

caused the record level upward trends in the market. The BB and the SEC did relax and in somecases reverse some of their decisions in that respect. Though the unusually high buy-pressure

pushed the index high, due to the stalemate in the buy-sell, the single turnover was very low Tk

977 crore.

Investors and stockbrokers cling onto the monitors as market prices fluctuate.

Photo: zahedul i khan

Since the nail-biting drama, the market is still dangling through ups and downs. Initiatives are

being taken from all aspects: BB, SEC, and the Government to stabilise the stock market but

according to Professor Salahuddin Ahmed Khan this is not happening: I don't think the marketis stabilising. As you can observe by now that the liquidity position as well and nervousness of

investors are still prevailing. It will take sometime to overcome the current state of the market.

Here the investors must also demonstrate some degree of restraint to overcome presentdifficulties. Proving his speculations correct, the share market hit its lowest turnover in nine

months on January 18. The continuously shrinking turnover stood at only Tk 8.49 billion, the

lowest since April 15, 2010, and Tk 24.01 billion lower than the highest-ever record of Tk 32.50billion, set on December 5, 2010. An official from a broker house, in condition of anonymity,

says that as Bangladesh Bank has not provided any written order on relaxing the bank loan


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threshold of 15 percent of their total capital to their subsidiary companies, the banks are not yet

confident in providing margin loans to investors and increase client exposure. Added to this, nor

institutions neither retail investors are interested in buying shares with high PE ratios. Theanonymous official complains that the merchant banks do have the money as they had sold most

of their shares months before the slide started. They are whining about their liquid crisis just to

create pressure on the Bangladesh Bank.

The have beens and the should haves

So what really went wrong? Why did the giant gas balloon, flying so high, start leaking? The

wavering policies of the regulatory commission are mostly blamed by the investors. The

regulator put in 83 directives during the period between January 17, 2010 and January 10, 2011.

It changed the directives of margin loan ratio 19 times. The regulators of the money and capitalmarkets in Bangladesh are opposite in characteristics, says Salahuddin.

The central banks all over the world are always very slow to respond. They seriously try to look

before they leap. Here in Bangladesh they are similar in characteristics. They have beenobserving the financial institutions are crossing their limits for investment in listed securities and

the actions came lately. On the other hand the SEC in Bangladesh always remains nervous. They

like to feel that whatever happens to the market, they will be held responsible. So they don't want

to see the market index or transaction go up and down at a high rate or beyond a certain level.Therefore they are continuously imposing new policies (forgetting that policies are long term

courses of actions) and again changing/amending it in rapid succession. In such a hectic work

environment, with such poor manpower they fail to pursue one of the universally acceptable roleof the securities market regulators, which is the role of monitoring market behaviour in terms of

ill trading (manipulations, abnormal price movements, improper trade executions etc).

Consequently, a group of market participants took advantage of the situations, analyses

Professor Salahuddin.

On what should be done to make the market less vulnerable to drastic changes and make it more

secure for retail investors Salahuddin says, The market base needs to be broadened. Newer

securities like derivative products, stocks, bonds etc need to be brought, more institutionalinvestment vehicles like pension funds, portfolio managers (not the lending based merchant

banks), mutual funds, unit trusts etc need to be created. The market regulations should be done

more professionally and the stock exchanges need to be demutualizsed at the earliest possibletime. However, one must realise that, the capital market is a dynamic market and so it cannot

remain stable. It will have waves moving ups and downs.

Game is the Name

Farhana Urmee

Oops, you lost the game! Quit or continue? When such boxes flash on one's computer screen itmight not be such a big deal for the player to stop the game that he or she has been playing for


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hours; it is not even that difficult to go on with the game because what is at stake are a few

points.

Quitting or continuing is just a matter of clicking the right button of the mouse and does notmake much a difference in one's life, as he or she is not investing any resource in the game. But

when one invests, especially when it is liquid money, the question of quitting matters quit a bit.

Take Zahir, a supervisor of an apartment complex at city's Dhanmondi, who earns around Tk

6,000 a month for his job. As the number of his family members has just increased, he needssome extra earning. The search for additional income and the sight of people making a quick

buck in the stock market have prompted Zahir to borrow Tk 50,000 to invest in the burse with

the hope of earning a bit more. Within 48 hours of his investment, the stock market experienced

a massive fall and his invested money has come down to almost less than half.

The search for additional income and the sight of people making a quick buck in the stock

market have prompted many to invest. Photo: zahedul i khan

Zahir thought that his investment would be safe, and this sense of security of 'no losses' led himto borrow the amount of money that was almost eight times his monthly income. After the fall of

the market, the profit from the investment has become a distant dream, and to make matters

worse, he is now burdened with a huge loan. Zahir is faced with the perennial question: Quit orcontinue?


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There are other small investors like Zahir who

have invested in the stock market with the hope

of seeing the prices of the share rise and are nowfaced with huge losses. Md Kamran Hasan. who

has been in this business since 2007, quit his

lucrative World Bank job, with the intention ofdevoting all his time to the market. He has also

been hit by the recent fall in the stock market.

His balance has witnessed a decline of aroundTk 19 lakh.

Asked why he gave up a regular job and

invested in the share market, he boldly says, If

I have a certain amount of idle money and if Iam sceptical about investing it in any business

due to many socio-political problems, why

shouldn't I invest in the capital market?

Regarding the recovery of his loss, he says thatthere is no way out other than take it on the chin

and wait for the time when the price of his

shares goes up to balance his initial investment.

While Kamran has decided to remain patientand wait for the right time to come, his wife Afreen Ferdousi is in despair as she has taken a loan

of Tk six lakh from a bank to invest in the stock market. Now only one and a half lakh taka is left

in her account.

Md Mostofa Rashel, a service holder in a private organisation, has been investing in the capitalmarket since he was a student. He, however, remains safe from the hit. During the period of

market correction there is scope for the market to fall but other factors are also at work which

ultimately makes some investors' accounts exhausted and help others to get rich overnight andget away from the market, Mostofa says.

He says that many investors have believed in rumours and have invested in companies that do

not have enough investment capital. The shares of these companies which have been bought

with a high price (which is not their actual price) can never reach the optimum level ofexpectation of the buyers, it is hardly surprising that the buyers have faced loss while selling

these shares, says Mostofa, adding that small investors should be aware of the market and its

tendency to rise and fall, as often some tittle-tattle can be responsible for the direction of thecurve of the market.

Again, decisions that come from the policy makers or the regulatory body should not come all of

a sudden. The market should be analysed throughout the year. Bangladesh Bank ought to

monitor the other banks investments in the capital market from the very beginning of the year

Small investors should be aware of the market

and its tendency to rise and fall, as often some

tittle-tattle can be responsible for the directionof the curve of the market.

Photo: zahedul i khan


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instead of giving decisions out of the blue, adds Mostafa, who lost half a million from his

prospective profit, although his initial investments intact.

Again Dhaka Stock Exchange (DSE) and Securities and Exchange Commission (SEC) need tomonitor the market regularly. When Kamran entered, the size of the market was Tk 80 crore and

now it boasts a market of Tk 3000 crore. The SEC still has the same manpower as before, whichis obviously insufficient, observes Kamran. Moreover the SEC needs more technical support to

conduct investigations, and it should also have the power over the reasonable balance of themarket, he continues.

In a country plagued with problems like unemployment, lack of investment plan and whimsical

investors whose only target is to gain 'a huge profit', the index of the market gets jittery quite

easily. It makes an enormous impact on the country's economy. To make matters worse, there isan insatiable desire to earn a lot of money in a short span of time, which always threatens to

make the capital market a gambling board.

Myopic Investors and Irregular Regulators

JYOTI RAHMAN and SHAHEEN ISLAM

Amid signs of weakening through most of December, the bull run in the Dhaka stock market

came to a screeching halt on the morning of Monday January 10, when the general index lost

more than 9.25 per cent within an hour of the start of trading. This prompted the Securities and

Exchange Commission (SEC) to suspend trading for the first time in its history. Angry investors,who had already demonstrated violently a number of times in December, clashed with the police,

thereby attracting the world's attention.

And then, on the following day, the market rebounded with the index rising by 15 per cent.

What happened? Why did it happen? What will happen next? What should (have) happen(ed)?

We don't pretend to have anything more than a tentative answer to only some of these questions.In a nutshell, by the end of 2010, Dhaka stock exchange was very much in the bubble zone.

What happened in the second week of January could have been a bursting of that bubble. A hard

landing has been avoided, at least for now. Instead of trying to guess what will happen next, let'sexplore how we got here, focussing particularly on the microeconomic aspects.

FundamentalsAsset prices are said to be in a bubble territory when they are unhinged from the economic

fundamentals. A few years ago, house prices in the United States and a number of Europeancountries reached the stratosphere, even though supply and demand could not explain the boom.

A few years earlier, stock prices of technology companies in the US reached levels unsupported

by economic fundamentals. Both were bubbles. In both cases, the initial rise in prices could havebeen explained by economic fundamentals: house prices were primed for a boom in the early

part of the last decade given low interest rates, and financial innovation allowed more people to


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enter the market than was previously possible; the tech boom owed its origin to the realisation in

the mid-1990s that the internet had tremendous potential.

Every bubble has its genesis in fundamentals. So it has been with the Bangladeshi stock market.Compared with similar economies in South and Southeast Asia, Bangladesh has been posting

remarkably stable growth since the 1990s (Chart 1). Meanwhile, with the landslide victory by theAwami League in the December 2008 election, investors had reasons to be optimistic about the

political climate in the country traditionally a key risk to investment.

Bubble

These fundamentals would have justified a bull

market. And until the second half of 2009, that's

what we had. However, from around August2009, the market started to get completely

unhinged from the fundamentals.

From the beginning of the decade till August2009, the direction of short-term fluctuations had

been unpredictable, even though it appreciated

strongly over the long run. Between August 2009

and November 2010, share prices rose everymonth. The price boom had lasted longer than

1996 (Chart 2). And with foreign participation in

DSE being less than 2 percent, the boom has beena domestically driven one.

But how can we tell that share prices had entered

the bubble territory? One way to make that call isto look at the price-earnings ratio (P/E ratio).

One of the fundamental reasons why people hold

assets is because of the stream of earnings they

provide. A low P/E ratio indicates that investors

have not taken much risk in view of past earnings:even if the price they paid seems high, the earnings have been high enough to justify such a

price. On the other hand, a high P/E ratio indicates that investors are overtly optimistic about the

future earnings of such shares, and are therefore willing to pay a higher price.

Chart 3 compares the mean P/E ratios for selected sectors after August 2009 with their long-run(December 2005 - August 2009) values. With the exception of the banking sector, every industry

has seen sharp rises in their P/E ratios. What fundamental changes in the economy could justify

the rise in P/E ratios in so many sectors to such extent?

Myopia

Interestingly, the industries with the smallest numbers of publicly-traded companies have tended

to post the largest increases in P/E ratios. This suggests that the increases in sectoral P/E ratios


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may have been driven by a handful of well-performing shares. Did the future profitability of the

firms concerned increase that dramatically that quickly? Or did these prices rise on the back of

word-of-mouth among myopic investors?

Let's think through the myopic investor idea with some examples.

Suppose one had invested 100 taka in DSE in January 2002. Five years later, it would have been

worth 240 taka solely through capital gains (that is, without accounting for dividends and

brokerage fees) an annual rate of return of 19.2 percent, significantly higher than what mostdeposit schemes pay. On the other hand, the value of the investment over the course of 2002-03

was much more unpredictable. Initially it rose, and then it fell such that the 100 TK had barely

appreciated if one were to liquidate in March 2003.

After the bubble burst. Photo: zahedul i khan

The point we want to drive home is simple: up until August 2009, the stock market was a tricky

place for investors looking for short-term gains, but a beneficial place for investors willing/able

to invest over longer time periods.

What happened after August 2009? An unprecedented good run in which the index appreciated

every month until November 2010, with the largest percentage increases in late 2009 and early2010. An investment of 100 taka would have only increased in value in this period, and not

decrease once (until the very end).

Suddenly, the stock exchange became a good place for short-term gains. This in turn attractedmore short-term funds, and the volume of trade on the Dhaka bourse increased as a result. In the

meantime, the number of retail investors who typically invest in a small number of shares went


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from less than 500,000 in 2006 to almost 3.5 million today. In just the first 10 days of February

2010, nearly 125,000 such trading accounts were opened.

Most of these retail investors have very little, if any, experience of a bear market, let alone acrash like the 1996. Indeed, the younger investors who reacted violently on 10 January would

have been in their teens during the last bubble. Moreover, unlike institutional investors,anecdotal evidence suggests that the individual investors rely less on analysis of the

fundamentals and trade more on personal advice from brokers or fellow investors. One can easilyimagine how a small number of such investors buying a particular share could lead to other

investors jumping on the bandwagon and bidding the price of that share through the roof.

Incidentally, one industry where the P/E ratio has fallen relative to the long run is bank. It's

possible that this shows the preponderance of large institutional investors in this sector. Suchinvestors are likely to rely more on fundamental analysis than short-run herd behaviour, and are

likely to enjoy superior information regarding the banking sector and its business models.

Regulators' irregularityInvestors usually buy/sell shares by putting down only a fraction of the money needed for

investment, with the rest being borrowed from brokers or merchant banks. The maximum thatcan be borrowed is a percentage of how much they put down. This percentage (also called

margin loans) is usually determined by the SEC.

In February 2010, with the bubble in full swing,

the SEC ruled that the maximum that can be lentwas 150 percent of the investor's down payment.

Thus, if we wanted to buy a stock worth100 taka,

we would only have to put down 40 taka of our

own money and could borrow the other 60 taka(150 percent of 40 equaling 60). Such loans could

not be given against stocks with P/E ratio of 50 or

more. This made short-term investing much easierand much more prone to moral hazard problems,

as more than half the investment could be made

with borrowed money.

By July it had become much clearer that the market was over-valued. The SEC tried to push on

the brakes, but not hard enough. It deemed that the margin loans could be a maximum of 100

percent of the down payment. Even then, a short-term investor would be using only half their

own money for investment. Their skin in the game had increased, but was it enough?

As it happens, apparently the SEC did not think so. Within four months, it squeezed the margin

limit further to 50 percent of the down payment, provoking angry reactions from retail investors

late last year. Within three weeks thereafter, it had loosened the requirement back to 100 percent,

and 5 days after that, back to 150 percent in the face of investor ire and a market-wide liquiditycrunch, as institutional investors such as banks withdrew money from the stock market.


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Even then, evidence suggests that most brokerage houses and merchant banks were not lending

up to the maximum margin, suggesting that at that point a minimum margin requirement would

have been more apt.

The SEC's actions thus seemed largely reactive to market developments, rather than anticipatory

or even contemporaneous.

The SEC was not, however, acting in a vacuum. The macroeconomic context of the boom has

been one of easy money. And the political economy of the boom has been framed by the fact thatthe party presiding over the last crash is in office now.

How did these macro and political economic factors fuel the bubble? And what should happen

now? These are the questions that have remained to be explored.

Jyoti Rahman and Shaheen Islam are economists and bloggers (www.unheardvoice.net/blog).


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Hundreds of angry investors have staged protests in the Bangladeshi capital, Dhaka, after the

stock exchange saw its steepest ever fall in a day.

Reports said they threw bricks at police, marched in the streets shouting slogans, and staged a sit-

down protest.

Shares in the stock exchange suffered large falls within hours of opening on Sunday as panicked

investors went on a selling spree.

The index ended the day down by 552 points or 6.72%.

It has been on a rollercoaster ride in recent weeks, hitting a record high on 5 December, having

climbed 80% since the start of the year.

But on 8 December it nosedived, prompting protests in Dhaka and towns elsewhere.

Slogans

On Sunday, at least 500 investors hurled bricks at law enforcement officers near the Dhaka StockExchange and the Securities and Exchange Commission (SEC) offices, said local police chief

Tofazzal Hossain according to AFP news agency.

"They chanted slogans against the government and the regulators, and marched through the busy

roads in the Motijheel Commercial area, halting traffic. They also staged a sit-in at the SECbuilding," he said.

Analysts say Sunday's index fall was triggered by a central bank interest-rate hike.

The regulators have also taken measures in recent weeks to restrict money supply into the share

market after concerns that stocks were overvalued.

The move forced big institutional investors to withdraw from the market, triggering panic amongindividual investors.

The rising value of the stocks in recent years has attracted hundreds of thousands of small-scale

or retail investors in Bangladesh, says the BBC's Anbarasan Ethirajan in Dhaka.

It became a popular investment for ordinary people, often providing higher returns than bankdeposits and savings.

Regulators have now agreed to relax some of the conditions, hoping that will increase the money

supply and stabilise the market, he says.


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