Strategy Note /
Bangladesh

Bangladesh spoils its stock market by interfering with limit-down prices

  • Market efficiency could be ruined by changing the floor price of stocks to the prior 5-day average until further notice

  • Inhibits efficient price discovery and accurate portfolio net asset value reporting for fund managers

  • Latest example of poor policy in Bangladesh and stock market interference in small EM (Jordan, Philippines, Sri Lanka)

Bangladesh spoils its stock market by interfering with limit-down prices
Hasnain Malik
Hasnain Malik

Strategy & Head of Equity Research

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Tellimer Research
19 March 2020
Published byTellimer Research

The Bangladesh Stock Exchange has issued a new directive which stipulates that the opening price of any stock shall be set at the prior 5-day average price and that this will also be the floor, or limit-down, price. This directive applies until further notice. This is the latest unwelcome interference in stock markets in small emerging markets.

Spoiling the stock market

At a stroke, this may kill off trading liquidity and the efficient functioning of this market, particularly for foreign investors, whose portfolios may have to support daily liquidity (redemptions) and have a requirement to report accurate (realisable) net asset values and who, therefore, need fully functioning price discovery (in simple terms, a properly functioning market).

Today the market index rose 10% but that could be highly misleading. For example, if an investor (local or foreign) wished to liquidate a sizeable position it is very unlikely that a buyer will emerge at, what the buyer will consider, artificially inflated prices.

This policy has echoes of Pakistan's shambolic and counter-productive introduction, in early 2009, of a ban on trading stocks below their opening price; an action which led to its expulsion out of MSCI EM (Emerging Markets) at the time, merely delayed the inevitable price collapse when normal trading resumed months later, and led to a period of eight years before re-admission to the EM index (in 2017) .

Latest market-unfriendly policy

This is the latest in poor (market-unfriendly) and ad hoc policy decisions by the authorities in Bangladesh: 

  • Grameenphone back taxes;
  • Banking rate cap;
  • Cigarette tax hikes; 
  • Pharmaceutical regulatory price increase delays; 
  • FX rate rigidity; and
  • VAT exemptions. 

In a moment of global and local crisis, Bangladesh appears to be compounding its problems.

Index weights

Bangladesh is currently included in the MSCI FM (Frontier Markets) and MSCI FM 100 indices with weights of c2.8% and c5.7%, respectively . Once Kuwait is promoted to EM (June 2020) these weights will rise to c5% and 10%, respectively, and by a little less should Iceland be included in FM.

Bangladesh's four stocks in MSCI FM are Square Pharma, Grameenphone, Brac Bank, and United Power Generation.

The MSCI Bangladesh IMI index is down 25% ytd in US$ total return terms, compared to 29% falls for both EM and FM. Trailing PB is 0.8x (10.6% ROE), which is a 40% discount to the 5-year median (compared to 20% discounts for both EM and FM). Trailing PE is 9x, which is a 28% discount to the 5-year median (compared to 19% and 16% discounts for EM and FM, respectively).