The jittery in Dhaka stocks though by nature is intermittent but the symptoms it radiates are funny when you consider the fundamentals of any well functioned stock market. Just one week back, the stock market dropped to a 27-month low. The frustrated investors who observed that the asset value is being eroded through the dramatic fall of DSEX, the benchmark index of the DSE by over 60 per cent, resorted to a token hunger strike for three and half hours that could not reduce the tummy of erratic investors but infuse optimisms through affirmative action of the fiscal authority. The jerk in stock market started mildly in February and gathered down syndrome at the end of April, accentuated by uncertainty and eerie fundamentals such as liquidity crisis in the banking sector, higher interest rate in deposit schemes and the inactiveness of the institutional investors on the exposure issue.
It appears it is an easy game for manipulators to tilt the market in their attuned way through their absolute control on the market. Again certain prerogatives because of institutional weaknesses accelerate the process. Moreover, failure by the regulatory authorities to bring important structural change by induction of reputed corporations in the share market to improve the profile is a case in point. The bourse lost over 29,000 crore which is over 7 per cent of the market capitalisation and the index is now hovering around 5,000 points. The abnormal swings in the share market are the manifestation that capital market, a principal tool of investment, is shy of market fundamental. Out of about 350 listed companies, the stock of over 70 per cent of companies declined in the last few days.
The reasons of the sweeping fall of previous two or three episodes manifest the role of gamblers in price manipulation through intelligent entry and exit strategy which they can manipulate through their inordinate share and collusive strategy in the market place. Like any market, the fluctuations in the prices of stock should follow some fundamentals. Consider election fever. There may be jittery in the index as we observed in the DSEX in October and November. Election sentiments and uncertainty may contribute to lack of buyers causing a smooth see-saw movement in the share market. Another element may be expectation which often can balloon the share market price.
The episode of dot-com bubble in United States is still in our memory when stock-market investors was optimistic in late 1990 on the burgeoning information technology and wildly speculated. When the optimism faded, stock prices fall by 25 per cent from August 2000 to august 2001. Last September, the share of Khulna Power Company Ltd dominated the bourse all over the country on the assumption that KPCL would acquire another power producer. The shares changed hands in an enigmatic way, the share prices recorded about 100 per cent rise and over 1,000 crore nearly four times of its paid capital was traded in the market. KPCL is an A-grade performing company which paid dividend over 50 per cent but any expectation should be based on rational expectation and should not be swayed away by mythical expectation. Financial scandal may often cause fall in share prices.
Manipulative profit through dubious way as was done by Enron and WorldCom is often cited as an example that mislead the investors about the profitability and when the real data was available, the stock price plummeted. The performance in share market depends on the level of interest rate. A higher rate of interest cannot be an elixir for the stock market. One of the reasons for poor performance of the stock market is the high rate of interest on deposit and the liquidity crunch that works as lifebuoy for investment in the share market.
Diversity of the market such as the composition and characteristics of the enlisted companies works as a smoothing factor in the index; service sector such as bank and non-bank financial institutions constitute about 30 per cent and over 50 per cent companies are in the share market with lousy fundamentals. Companies with good fundamentals such as pharmaceuticals and Power Company constitute only 20 per cent weight. Many companies after enlistment showed inflated earnings that conveys a wrong signal to uneducated investors. When companies with good fundamentals are reluctant to float their stock or the authority failed to bring them in the net, the weight of the poor performing dominates the index. The sweeping fall in the index is thus the result of this disproportionate share of sub-par companies and is often fuelled through the inactiveness of the regulatory authorities when genuine breach is unearthed in market transactions.
The writer is a Professor of Economics, United International University.