During this pandemic, central banks from around the world, including ours, have taken massive steps to ensure liquidity in the money markets. With the stock market closed, I will argue, certain liquidity was taken off the table. This is the first part of a two-part series
In the beginning of January 2020, reports from China started coming out of a new virus infecting people at an alarming rate. Initially it was mostly touted as something similar to a new strain of influenza with very low mortality rates.
Fast forward to March 2020 and more than half the world has gone into an unprecedented lockdown. The general populous was forced to learn new terminologies such as social distancing, flatten the curve, pandemic, PPE, frontline workers etc.
If there was ever a curiosity to see what the world would look like if everyone suddenly stopped on their tracks, this would be it. Global air travel fell over 80 percent, supply chains were decimated, basic medical protective units were suddenly in short supply, and unemployment hit historic levels in many countries.
The world stopped due to a virus and the effects will reverberate for years to come.
Before Covid-19, cracks started to show in the economy of Bangladesh in the form of a banking crisis. While our nation registered steady GDP Annual Growth over the last 10 years (an impressive 8.2 percent last year), bad banking practices could no longer be ignored and the tiring economy was starting to reveal the growing systematic weakness in the banking sector. And everyone knows, if the banking sector is weak then the stock market will be weaker.
Since the stock market crash of 2010, Dhaka Stock Exchange (I will refer mainly to the data from DSE as it accounts for over 90 percent of turnover between the two bourses in Bangladesh) has had a very challenging time in regaining a sustainable bull run. The period between May 2, 2016 and January 3, 2018 showed promise with the DSE General Index (DSEX) rising from 4,171 to 6,318 (a 2,147 point increase, up by 51.47 percent).
However, right after the 2018 Bangladesh general elections, the market started another bear run. Quite surprising since stock markets love stability and the re-election of this current government should have signaled a continued recovery.
But that was not the case as the DSEX fell from 6,318 on January 3, 2018 to 4,768 on February 17,, 2020, a decline of 1,550 points. Many in the industry always felt the divergence between the impressive GDP growth status of Bangladesh and the lackluster performance of the DSEX over the 10 year period.
Various explanations were provided- lack of good corporate governance in listed companies, under performing companies allowed for IPOs, placement shares, terrible policies regarding mutual funds, cumbersome listing procedures for good companies, high savings rate offered via Sanchayapatra/FDRs (discouraging relatively risky stock market investment), lack of an active bond market, stringent Bangladesh Bank capital market exposure limit policies (discouraging financial institutions from investing in the stock market), etc.
All these and now add Covid-19, the single greatest threat to mankind and the economy in our lifetime. So naturally the bourses, which were already in a bearish trend started to really pick up steam and crash again. From the middle of February (when the world started to grasp the severity of the coronavirus) the DSEX fell from 4,768 on February 17, 2020 to 4,008 on March 25, 2020 when, unfortunately, the stock market was shut down.
Covid-19 created a seismic sense of panic for the world (and still does) and in this panic two very important decisions came from the Bangladesh Securities and Exchange Commission (BSEC) and the Government of Bangladesh. Two decisions implemented in a span of seven days.
On March 19, 2020, a historic "floor price" was set for all the stocks in the stock market to stop the natural fall of stock prices. This historic decision by the BSEC ensured that every listed company's stock price was set at a certain rate and the prices could not be traded any lower than that. The calculation was simple – the average of the five preceding trading days' closing price for all stocks traded on March 19, 2020 (something similar was implemented in the Karachi Stock Exchange in August 2008).
In our inefficient stock market, this seemed to be the "only way" to stop the bleeding. The sudden implementation of this rule created massive confusion in the investment community as most couldn't quite grasp the calculation of this alien rule. Many investors and professionals thought of it as a moving average – where the floor price would change after every five days.
This confusion forced many active investors onto the sidelines looking for clarity in a situation of panic. And by the time they figured out this rule, Bangladesh entered lockdown on March 26, 2020.
The government declared a general holiday for 10 days starting on March 26, 2020 and only allowed certain essential services to operate. As a general holiday was declared, the Bangladesh Securities and Exchange Commission (BSEC), the regulator of the stock market decided to follow the government orders (arguments were later made that they could have officially stayed open).
And if your regulator goes on holiday, so must you, whether you like it or not. And so, since March 26, 2020, the Dhaka Stock Exchange Ltd., the 44th largest stock market in the world (by market capitalization) has remained closed as the government has extended the general holiday seven times.
In this pandemic, it is the stock exchanges of Bangladesh which have remained non-operational. No other significant stock exchanges in the world are closed. The DSE has a market capitalization of $33 billion, which contributes roughly to 14 percent of GDP. The other stock exchange that was closed for a month is the Colombo Stock Exchange with a market capitalization of $14 billion.
So what is the impact of this closure? The argument can be made that the closure has ensured that no one from the stock market community will be infected and as such lives will be saved. A valid argument but as time goes on, the world is starting to realise that this virus is not going away anytime soon, unless a vaccine (which under normal circumstances takes 18 months to develop) is discovered. Keeping the stock exchanges closed for an indefinite period of time will do more harm than good.
While our stock market has had dismal performances, it is, in my opinion an essential financial service. The stock market is all about liquidity. That is its very essence. During this pandemic, central banks from around the world, including ours, have taken massive steps to ensure liquidity in the money markets. Capitalist economies thrive on liquidity. With the stock market closed, I will argue, certain liquidity was taken off the table.
By last count, there are 2.6 million BO account holders in both the exchanges. So potentially these BO account holders have some form of investment which should be readily accessible to them. And in a prolonged pandemic, many may need to liquidate their shares to raise cash to furnish their livelihood. Yes it is always advocated that one should not invest in the stock market if the investor may need to recoup his/her cash in a short period of time. Stock market investment should be for the long run.
However the reality is, in Bangladesh, with mediocre levels of financial education, we cannot possibly expect retail "investors" to follow this practice all the time. We always hope they do and many awareness programmes have been conducted over the past 10 years to hammer in this exact principal. But reality is quite different.
Another impending issue is the case of margin loans. Many investors will soon have to pay interest on loans taken out to buy stocks. Typically the interest on these loans range from 12 to 18 percent annually and do not fall under the recent Bangladesh Bank's nine percent interest cap directive or the two months interest waiver.
These investors will have to pay for loans for stock holdings which could not perform as the bourses are closed. This is also unfair. Imagine losing a significant part of your equity due to a pandemic selloff, unable to sell your shares and on top of that, being forced to pay interest on an asset that is not allowed to perform.
Brokers, merchant banks and capital market intermediaries do not fare well either. They have zero revenue coming in for the month of April and May. Most of these institutions have been performing poorly for the last few years due to dismal stock market performance. And with two months of zero revenue, things will only get worse. Many brokerages are unable to pay employee salaries.
But the biggest damage of all is the damage done on market confidence. As a market proclaimed as most liquid, ours have become illiquid all of a sudden. The ripple effects will potentially carry on for years. Investing in the stock market already carried a negative stigma for most investors and this recent episode will clearly add to that.
Those who thought about investing will now be forced to think twice. Imagine putting your money into a bank and not being able to withdraw that all of a sudden. And it is not just the investors in Bangladesh, the world is watching as well.
Many foreign investors have echoed frustration for not being able to have access to the market to liquidate their holdings whenever they decide. The investment Director of Aberdeen Standard Investments, an international institutional investor, recently criticized the DSE and the BSEC for the prolonged closure of trading on the bourse.
He went far enough with this quote, "… questions are being asked by specialists in operational risk control as to whether the DSE should be rendered permanently non-investable for foreign funds". There is also the speculation that in the upcoming review MSCI, a global market index, may drop the DSEX altogether on account of the prolonged closure and inability to operate.
Such an action will make our stock market non-investable by many foreign funds.
Md Ashequr Rahman, is Managing Director of Midway Securities Ltd