Bangladesh stock market is again on a bull run - possibly, of a mild nature. In the last few days price index crossed the psychological level of 6000 points; it may go even further. Though most of the stock investors and stakeholders are happy to see the recent price movement on the Dhaka Stock Exchange, there are some who are sceptic about the development. In fact, rumours and misinformation abound, and many investors are falling into the trap of the rumourmongers. It happens all over the world. Most of the cases of cheat and scams take place when the markets behave upward over a period longer than investors normally expect.
When there is a bull run, one should examine whether it has been cooked up by some vested quarters having special interest or by the fundamentals of the economy. If the stock market and the real economy move together then there is a less likelihood of a danger for the investors. But when the stock market goes much ahead of the real economy, then one should be beware of a storm. Man-made push or artificial creation of demand for stocks does not last; when wind clears the dust, market turns flat. But in the meantime, many investors, specially the new entrants, get bloodied. Without a surging economy, a surging stock market cannot exist. The retail investors cannot compete with the gamblers or men who manipulate an artificial surge. The gamblers are united in some way, but the retail investors are not, or even cannot, get united. The whole objective of making an artificial surge in the stock prices is to woo the retail investors to step in. But the truth is that, as the history repeats itself, the retail investors also make the same mistakes which they made in the past. They forget the events of the past very quickly and again start behaving irrationally.
Are the stock investors rational? Very few of them are, but these very few not necessarily win always or even feel safe with their investments. As the other investors are not rational, the rational ones are deemed to be irrational by the majority in the stock market.
Even many stock market pundits maintain, as the stock market itself is not rational, there is no logic of behaving rationally by some investors. If they behave so, they will be only the losers. What does it mean? Does not it mean that on the stock market the irrational herds are trying to beat each other? Yes, many experts want to call that condition as the normal. To them, stock market investment is nothing but the play of the irrational people, who, in most cases, play a zero-sum game. But this logic is not the whole story. The rational investors, who behave differently than the herds, also do well. They do not lose the gain they make playing in a zero-sum game. They reap the real benefits from stock market investment. May be, they grow rich slowly, but they grow rich surely.
Bangladesh stock market is so small that if an additional few thousand investors enter the market with fresh money, there will be a bull run on the market. This type of bull run is nothing but the result of the inflow of the fresh funds. In the last few years market interest rates behaved downwards and so also is the case of government-owned owned savings instruments. So, many investors or depositors found stock market a better place for using their money. Definitely, there was fresh flow of money in the stock market. But is the market buoyancy sustainable? Many wise people are asking this question - may be not so directly. Sidetracking the issue of stock market price index, they are asking: will the Bangladesh gross domestic product (GDP) growth rate cross the 7.0 per cent against the backdrop of the recent devastating floods? Will the Bangladesh export growth be able to match the records of the past? Will the remittances flow from the non-resident Bangladeshis outperform the one of the past? Will the stock market have more of quality stocks in the coming years?
Is the Bangladesh stock market with its present depth and size can go beyond the present level of price-earnings ratio? Is there a surge in the expectation of the consumers as well as of the investors in the private sector? Is any good news on the horizon for Bangladesh economy? If answers to these questions are not in the positive, then the surge in the price index of the stock market is anything but normal.
The recent surge in the stock prices is mostly contributed by the banks' stocks. But some of these banks are sunk in bad debt up to their necks. Some of these banks offered dividends to the investors in the last fiscal year by taking special permission from the Bangladesh Bank. They were short on making provisions against the bad loans.
Everywhere, every time, the fundamentals of stocks and that of the economy matter. The Bangladesh market should not be an exception.
The writer is a Professor of Economics, University of Dhaka.
