Co-authored by Asif Khan, CFA and Sajib Hossain, Lecturer of finance at Dhaka University. Original article appeared at Dhaka Tribune Website.
The Bangladesh stock market is still in an infant stage when we consider
the maturity of investors, the quality of corporate disclosures and the
strength of the regulators. Therefore, it is no wonder that the market
in Bangladesh is highly driven by momentum where investors have short
holding periods.
In the short run, the market tends to act like a zero sum game. If
someone wins, someone else has to lose. This is the perfect situation
for the slaughter of small retailers.
Let us go through the problems one by one:
Quality of earnings and financial disclosures:
The first major problem is related to the “quality of earnings” and the
level of financial disclosures. Quality of earnings refers to the
sustainability and trustworthiness of earnings numbers. At present,
other than a handful of listed companies, it is very difficult for
knowledgeable investors to trust the financial statements. The blame, to
some extent, goes towards the auditing firms. However, the first step
in preparing clean and transparent financial statements has to be taken
by the companies themselves.
Secondly, the accessibility to financial statements is a big problem in
itself. Many of the companies do not have websites, and even if they do,
the statements are not uploaded in due time. The solution to this
problem is to upload statements in the stock exchange websites.
Without access to trustworthy and timely financial statement it is not possible to do fundamental analysis.
Insider Trading:
Insider trading refers to the trading of shares by people who have
access to material news flow, like earnings and dividends, before they
are disclosed to general investors. Examples of such investors would be
company management, audit firms, company directors etc. This harms the
retail investors who get the news flow only after it has already been
priced into the share.
The problem lies in the lack of a strong legal framework, along with the
enforcement of such laws. For example, if a person earns Tk10m from
insider trading and is fined Tk100 thousand, he will happily pay the
fine. Therefore, in order to discourage insider trading, the scale of
the punishment has to be increased by a large magnitude. We do realize
that the regulators might not have adequate manpower to catch all cases
of insider trading. However, even if they could set some examples by
penalizing few high profile cases, that should work as an example to
others.
Pump and dump strategies:
Next, we have pump and dump strategies. By cornering shares (reducing
liquidity) and spreading rumors, some manipulators jack up the stock
prices in order to dump their holdings on to the unsuspecting retail
investors.
As the stock market is a sensitive issue, regulators and governments are
sometimes afraid to take steps against market manipulators for fear of
the market coming down. In the short run, that is a possibility.
However, in the long run, these steps would be much more beneficial to
all the stakeholders.
Lack of knowledge of investors:
The lack of knowledge of retailers, and even some institutional
investors, is also a problem. Even today, stock bonus is considered to
be something great and causes stock prices to go up significantly. When
the target victims are not smart enough and need to rely on rumors to
make money, they are likely to lose money in the stock market.
The players who will continue to make money will be the “insider trader”
and the “large retailer” because of information and capital advantage.
If these guys continue to make money, then someone else will lose it.
Lack of transparency in asset management industry:
The stock market is not for everyone. Not everybody has the time to
study or learn it. Therein lays the importance of professional fund
management. However, the present state of the managed fund business
would deter most of the investors who would like to give funds for
professional management.
Before giving funds to a management company, an investor needs to look
at its track record, investment strategy, background of fund managers
and top holdings. None of this information is available in Bangladesh.
However, by not promoting transparency, not only are many investors
forced to take a shot at investing by themselves based on rumors, the
asset management industry is also not growing as much.
Conclusion
In such a situation, the chances for retail investors to make money will
be limited. In the short run, the momentum chasing strategies could
work out, but eventually the investor is likely to make losses.
We should not let the stock market turn into another tool for
redistributing wealth from the poor to the rich. In a country where
saving instruments are limited, the role of the stock market is crucial.
Before everything else, we need to focus on corporate governance,
minority shareholder rights and quality of auditing.
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