Morgan Stanley's "special treatment" for Bangladesh sends out warning against illiquidity of assets

| Updated: February 14, 2023 12:12:41

Morgan Stanley's "special treatment" for Bangladesh sends out warning against illiquidity of assets

Global investment research firm Morgan Stanley Capital International (MSCI) in its latest quarterly review decided to bring no change in measuring Bangladeshi stocks' performance in its frontier markets index due to "the deterioration of liquidity" in the equity market.

MSCI provides investors with data and analytics in helping them make investment decisions. It is well known for benchmark indexes, such as MSCI emerging markets index and MSCI frontier markets index.

A couple of leading market operators told The Financial Express that the decision by MSCI would lead to a further drying up of foreign investments in Bangladesh's stock market and would discourage new investors from entering it as they rely on MSCI indexes to make allocations for different markets.

Foreign trade accounted for about 5 per cent of the daily average turnover a couple of year ago, which plummeted to 2-3 per cent by January this year, according to BRAC EPL Stock Brokerage.

"MSCI will not implement changes as part of upcoming index reviews for any securities" for the MSCI Bangladesh indexes, said the research firm in an announcement made last week.

It also mentioned giving Bangladesh "special treatment" based on feedbacks from market participants against the backdrop of the floor price imposed. The price movement restriction is not letting stocks fall down further after a certain level, thus making shares illiquid in absence of buyers.

Md Ashequr Rahman, managing director of Midway Securities, said the special treatment came as the Bangladesh market, part of the MSCI's indices for frontier markets, is not functioning properly.

He deems the review "very crucial" at a time when the market is falling short of liquidity.

MSCI has an official term, price adjustment. The factors such as placement, block sales, re-capitalisation of Bangladeshi companies will not be considered in rebalancing the MSCI index because these factors are not within the purview of price adjustment, he said.

If the price adjustment factors such as stock split, rights shares, buybacks, delisting, merger or acquisition are done by Bangladeshi stocks, MSCI will have to change its index calculation.

"MSCI created a special circumstance as the price discovery is not happening correctly because of the imposition of floor price," added Mr Rahman.

Echoing the view, Arif Khan, vice chairman of Shanta Asset Management, said Morgan Stanley took a separate position for Bangladesh since the usual trading practices in the market are impeded.

Several market insiders said foreign investors would not be aware of any modification in the country's stock market if MSCI brought no changes in its index.

The Bangladesh Securities and Exchange Commission (BSEC) set floor prices on March 19, 2020 for the first time, forbidding stocks from falling below their average prices of the preceding five days. The move was aimed at stopping stocks from free-falling following the outbreak of the pandemic.

Afterwards, the securities regulator lifted the restriction in three phases amid criticisms by experts and foreign investors.

The floor price was re-imposed in July last year against the backdrop of the Russia-Ukraine war and global economic slowdown.

In December 2022, the restriction was lifted for 168 securities, allowing price corrections up to 1 per cent for those in a single trading session.

Morgan Stanley maintains indices for 28 frontier markets, including Bangladesh.

The companies which are in the index of Morgan Stanley are Square Pharmaceuticals, Beximco, British American Tobacco Bangladesh, Grameenphone, Renata, Robi Axiata, and United Power Generation and Distribution Company.

Of the seven companies, the foreign stake at Square Pharma declined to 13.62 per cent in December last year from 13.91 per cent in June.

Foreigners held 3.11 per cent stake in Grameenphone in December 2021, which dropped to 2.04 per cent in January this year.

"The foreign participation mainly depends on fundamentals of listed securities. You need not to invite foreign investors if your market has strong scrips and once the floor price is withdrawn," said Misbah Uddin Affan Yusuf, chief executive officer of City Brokerage.

BSEC Commissioner Dr. Shaikh Shamsuddin Ahmed, however, sees the MSCI's observation about the market positively.

Foreign portfolio investors shifted their investments from different countries, mainly after the increase in interest rates in their home countries, Mr Ahmed said. "We are not in favour of floor price. We will think twice in future before imposing floor price."

The country's capital market saw a gradual decline in foreign portfolio investments since 2018. The fall in foreign holdings expedited last year.

The MSCI said it would continue implementing corporate events tied to price adjustment factors, such as stock splits, consolidations, rights issue, buybacks as well as deletions resulting from delisting, bankruptcies, mergers and acquisitions as well as prolonged suspensions at the time of the event.

MSCI would welcome feedbacks from market participants on the accessibility of Bangladesh. It also said it would continue monitoring the market closely and "issue further communications as warranted".

Bangladesh was elevated to frontier market from standalone market in May 2010.

MSCI previously applied special treatment for Bangladesh in 2020, after the BSEC introduced floor price that resulted in a plunge in trading. A similar move was taken for Lebanon, Sri Lanka and Nigeria at that time.

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