Flash Report / Bangladesh

Bangladesh stock market to resume on 31 May; price floor likely to stay for now

  • Dhaka Stock Exchange is preparing to start trading on Sunday; the regulators will meet 28 May to finalise plans
  • The regulators plan to restart the market even if the country-wide holiday is extended
  • The price floor is likely to stay when the market starts

The Dhaka Stock Exchange (DSE) is preparing to resume its operation on 31 May 2020, according to reports. DSE has communicated to its employees to be prepared for all trading and settlement activities from Sunday. The stock exchange has taken this initiative as per the instruction of the newly appointed Chairman of Bangladesh Security & Exchange Commission (BSEC). The regulators will hold a commission meeting on 28 May 2020 (tomorrow) when they plan to finalize their decision about it.

The regulators plan to resume the market even if the government extends holiday after 30 May 2020. Please note that Bangladesh has been experiencing a 66-day long Covid-19 ‘holiday’ till 30th May, the highest lock-down in its history after the Independence War in 1971. The holiday comprises 38 days of general holiday (i.e. lockdowns), 20 weekends, and 8 public holidays.

When the market starts, the price floor is likely to stay, as mentioned by the BSEC Chairman in an earlier online interview. Since his tenure just started as the stock market regulator, he is likely to observe how the market reacts and take feedbacks from different stakeholders before reviewing the price floor withdrawal. Some stakeholders think that the withdrawal of the price floor, followed by a downtrend in the market, would trigger sales from margin loan accounts and would further worsen the situation, thus advocating for price floor. So, the price floor may not be withdrawn immediately after the market starts.

However, the price floor will lead to a low level of market turnover and shrink the profit of brokerage businesses. Therefore, the regulators have to address this issue, eventually. So, we do not expect the price floor to continue for long. First, the regulators will take steps to start the market, and then eventually lift the floor price.


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Strategy Note / Bangladesh

Bangladesh: Stock market to re-open on 17 May, 8 weeks after shutting

  • A rally of 17% in regional peers and 6% in global indices post-26 March shutdown suggests an orderly re-opening likely
  • Regional peers and global benchmarks are down c20% ytd; before closure DS30 was down 12% and MSCI Bangla was down 18%
  • But contrived limit floor price mechanism (took effect on 22 March) creates a long-term overhang of foreign sellers
Hasnain Malik @
Tellimer Research
7 May 2020

Stock market shut-down will leave a bitter taste but others have been forgiven

The shut down of the equity market in Bangladesh likely leaves a long-lasting bitter taste for foreign institutional investors. Many will be put off by the ad hoc closure of the market for such a long period - Bangladesh, Jordan, and Sri Lanka are the only equity markets to shut for this length of time. 

For most foreign institutional investors when a market is shut for so long they cannot fairly attribute a value to their positions in that market or liquidate them. This has the knock-on effect that performance fees on this portion of their fund are put at risk and, worse, if their fund suffers a redemption, during the time this market is closed, they may have to sell disproportionately out of positions in other countries.

Of course, nothing is unforgivable and foreign institutions have returned with considerable vigour to markets which have endured long, unplanned effective shut-downs before, eg Egypt and Pakistan, albeit years later.

A relatively orderly re-opening...

If there was no further global change then there is unlikely to be a rush to sell when the Bangladesh market re-opens. Regional peer equity markets (Pakistan, Philippines, Vietnam) are up 17%, on average, since the Bangladesh market shut. Global benchmarks (DM, EM, FM, FEM) are up 6%, on average. Furthermore, on a year to date basis, the performance of Bangladesh prior to its closure (down 12% for the local DS30 index and down 18% for the large cap-biased MSCI country index) is close to the average c20% decline of regional peers and global benchmarks.

...But a long-term overhang of foreign sellers due limit-down price interference

Perhaps, more important than the market shut-down is the change to how limit-down prices were changed (taking effect on 22 March, shortly before the 26 March shut-down). The opening price of any stock is now set at the prior 5-day average price and this average is also used to set the floor, or limit-down, price. The effect of this change will be to make price-discovery less efficient and reduce overall trading liquidity. 

The contrived formula for maintaining a high limit-down price likely puts off potential buyers of institutional-sized blocks of stock. To a degree, foreign institutional investors with large positions in Bangladesh, particularly those which need to support high levels of liquidity in their overall fund (ie stand ready to meet any redemption quickly), are facing the prospect of quasi-trapped capital. Therefore, we expect there will be a gradual, long-lasting withdrawal from the market by foreigners. This could end up looking like the persistent overhang for the market which dogged Nigeria for many quarters after currency repatriation improved in 2017 and trapped foreign capital was able to escape.

 

Compounds poor regulatory policy from a government under little political pressure

Bangladesh has many positive investment drivers: 

  • Low-cost labour; 
  • Low tariff access to the EU;
  • Extremely dense urban population;
  • Rapid growth (in the broad economy, urban population, mobile broadband, and mobile financial inclusion);
  • Low domestic political risk (the de facto one-party state under the Awami League); and
  • Geopolitical support from both China and the rival India-centric group.

These are spoiled by poor policy decisions. These two instances of interference with the stock market (closure and limit-down prices) compounds a list of poor regulations: 

  • Banking rate cap; 
  • Legacy poor asset quality in the state-owned banking sector;
  • Unpredictable and market-unfriendly tax changes in the telecom and tobacco sectors;
  • Delayed regulatory price increases in pharmaceuticals
  • An inflexible and over-valued currency. 

With a potential foreign investor overhang, a substantially larger valuation discount versus historic average (all regional peers are cheap relative to history) may be required to make Bangladesh equities compelling again.

And then there is, of course, Covid-19 and the oil price

All of this is before considering the disruption from Covid-19 and low oil prices. The promised fiscal response to Covid-19, equivalent to 2.5% of GDP, is on par with Pakistan and much higher than India's 0.8%. However, extreme urban density (almost 33,000 people per square km in cities with over 0.5m population) makes for ineffective implementation of social distancing to contain infections. A very high level of informal labour (over 90%) also makes the economic impact of the sudden-stop in activity severe. (The IMF's forecast for 2020 growth was cut from 7.4%/ 7.3% to 2.0%/ 9.5% in its April update).

Lower oil prices should drive lower imports but also lower remittance inflows. The drop to US$30 oil should benefit the current account balance by about 0.3% of GDP. A 20% drop in remittances from the GCC would be equivalent to about 0.5% of GDP.



 
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Strategy Note / Sri Lanka

Sri Lanka: Stock market to re-open on 11 May, 7 weeks after shutting

  • A rally of 14% in regional peers and 15% in global indices post-20 March shut-down suggests an orderly re-opening likely
  • Regional peers and global benchmarks are down c20% ytd; before closure CSE All was down 27% and MSCI Lanka was down 34%
  • Shutown likely leaves a bitter taste for foreigners but they have forgiven lengthy ad hoc disruptions elsewhere
Hasnain Malik @
Tellimer Research
7 May 2020

Stock market shutdown will leave a bitter taste but others have been forgiven

The shutdown of the equity market in Sri Lanka likely leaves a long-lasting bitter taste for foreign institutional investors. Many will be put off by the ad hoc closure of the market for such a long period – Bangladesh, Jordan, and Sri Lanka are the only equity markets to shut for this length of time. 

For most foreign institutional investors, when a market is shut for so long they cannot fairly attribute a value to their positions in that market or liquidate them. This has the knock-on effect that performance fees on this portion of their fund are put at risk and, worse, if their fund suffers a redemption, during the time this market is closed, they may have to sell disproportionately out of positions in other countries.

Of course, nothing is unforgivable and foreign institutions have returned with considerable vigour to markets which have endured long, unplanned effective shutdowns before, eg Egypt and Pakistan, albeit years later.

A relatively orderly re-opening...

If there was no further global change then there is unlikely to be a rush to sell when the Sri Lanka market re-opens. Regional peer equity markets (Pakistan, Philippines, Vietnam) are up 14%, on average, since the Sri Lanka market shut. Global benchmarks (DM, EM, FM, FEM) are up 15%, on average. Furthermore, on a year to date basis, the performance of Sri Lanka prior to its closure (down 27% for the local CSE All Share index and down 34% for the large cap-biased MSCI country index) is much worse than the average c20% decline of regional peers and global benchmarks.

...But quite an anaemic investment case ahead

Sri Lanka equities are cheap relative to history, but this is not a distinguishing feature among its regional or global frontier peers. 

There is tension in the top-down investment case between hopes of more decisive, pro-growth and pro-foreign investment policy implementation under the Rajapaksas (President Gotabaya and his brother, Prime Minister Mahinda) and concerns over fiscal sustainability, FX rate vulnerability, and political cohesion (not so much within the ruling coalition that might emerge from the 20 June parliamentary election but the potential authoritarian exclusion of those outside it). 

Obviously in the short-term, the combination of Covid-19 and lower oil price hurt growth (the IMF forecast for 2020 and 2021 growth was cut from 3.5%/ 4.3% to (0.5%)/ 4.2% in its April update). The current account also suffers in 2020: the benefit of lower-priced oil imports (equivalent to c2% of GDP if oil price remains around US$30), is likely more than offset by lower remittances from the GCC (a 20% cut would equate to 0.8% of GDP) and lower overall tourist receipts (a 30% cut would equate to about 1.8% of GDP).

Twin deficits, high external debt (almost 70% of GDP), and short-term external debt higher than FX reserves, implies that much is riding on credibility of policy. This, in turn, almost certainly requires a follow-on IMF deal (the current Extended Fund Facility expires in June 2020). The catch-22 is that the fiscal conditions attached to that IMF deal may undermine some of the hopes pinned on the Rajapaksas to revive the economy.


 
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