Why DSEX still looks fine while most stocks are falling free
Dhaka bourse’s main index would have dropped even more if certain stocks had not been excluded
Since the withdrawal of the floor price in January, investors have seen their capital erode by 30-70% in most company shares traded on the Dhaka Stock Exchange (DSE). Surprisingly, the broad-based index, DSEX, appears relatively healthy, having decreased by only 18% to date this year.
Analysts said that during the floor price withdrawal in the third week of January, the DSE excluded 83 listed companies from the index for failing to meet minimum turnover criteria, which helped maintain a more favourable index reading.
According to an analysis by LankaBangla Securities on Thursday (24 October), DSEX, which closed at 5,114 on the day, could have fallen to 4,338 if those 83 declining stocks had remained part of the index.
The 83 companies include several prominent names across 10 different sectors such as Walton, Ifad Autos, Quasem Industries, IDLC, IPDC, ICB, Lanka Bangla, Titas Gas, United Power, Desco, Summit Power, ACI, Ibn Sina, Acme Lab, RAK Ceramics, Shinepukur Ceramics, NCC, Dutch-Bangla, Mutual Trust, Dhaka Bank, Envoy Textile, Matin Spinning, Square Textile, Shasha Denims, and Esquire Knit.
Together, these companies accounted for over 19% of the total market capitalisation of all firms listed on the DSE.
In contrast, based on free-float market capitalisation, the 83 companies' market capitalisation is 17.23% of the total of all the 360 stocks in the DSE.
"Due to their exclusion, the DSEX was around 18% higher, compared to where it could have been on Thursday," said Md Abdul Kader Nabil, head of Corporate & Intermediaries Department at LankaBangla Securities.
The most followed equity index in Bangladesh is not showing the actual picture of the stocks, he added.
DSE officials in January said their index committee, based on the S&P index methodology, excluded the 83 stocks and included 16 others for the next one year and the exclusions were mainly due to the failure to ensure the minimum turnover criteria in the previous months.
"Sounds fine, as the bourse went by its announced rules," said Md Alamgir, a retail investor in the capital.
"However, the index is misleading all of us by not reflecting the extent of free fall. All but a very few stocks are bleeding," he added.
"These companies or stocks were unfairly penalised for something they didn't do," said Saiful Islam, president of the DSE Brokers Association (DBA) of Bangladesh.
"The low trading volumes of those stocks were due to an unusual regulatory decision — floor price and the factor should have been taken into consideration when excluding the 83 stocks from the index," he said.
LankaBangla's Abdul Kader Nabil said the rosy picture of the broad-based index is set to continue for a long time as the index is rebalanced once a year.
He said the DSE should think of a special review considering the unusual situation.
The Bangladesh Securities and Exchange Commission (BSEC) imposed a floor price on individual scrips at the end of July 2022 to arrest a fall in the market amid the economic crisis induced by the Ukraine War.
As buyers did not find the artificially held price rational, most of the listed stocks remained off-trading for a long period of over one and half years, until the BSEC started removing the floor prices.
Meanwhile, the restrictive regulatory measures also compelled global index providers like MSCI and FTSE Russell to pause their reviews of Bangladeshi stocks for a year and a half, a process that has only recently resumed.