2022 should be much better than 2021 for the capital market


The stock market is expected to grow in size and depth as there are some initiatives to get certain large companies listed. Secondary Fixed Income Market Expected to Expand From Currently Very Small

31 December 2021, 13:30

Last modification: December 31, 2021, 01:32 PM

As the market expands and investors become more informed, the market should gradually become more efficient. Photo: TBS

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As the market expands and investors become more informed, the market should gradually become more efficient. Photo: TBS

The intrinsic value of financial assets depends on two things: the future cash flows that the assets are expected to generate over their lifetime and the discount rates that investors use to derive the present value of the cash flows.

In the case of stocks, the cash flow is in the form of dividends. In the case of bonds, coupon payments and principal repayments by issuers represent cash flows. Discount rates are the rate of return required by investors to hold the assets. The rates of return required by investors depend primarily on the opportunity costs of money invested in capital market instruments.

A market is efficient if the market prices of securities are close to their intrinsic values. A market is inefficient if the prices of securities are disconnected from the intrinsic values ​​of the assets or from the economic fundamentals of the issuers of the securities.

No market in the world is perfectly efficient. The level of market efficiency varies considerably: some markets are much more efficient than others. Developed financial markets, where there are many sophisticated investors, are generally more efficient than underdeveloped markets where investors are relatively less knowledgeable and corporate information is inadequate.

Efficient markets serve society better than inefficient markets. In efficient markets, financial assets are valued fairly. As a result, investors obtain reasonable risk-adjusted returns on their investments and issuers of marketable securities are able to raise capital at reasonable valuations.

Our country’s stock exchange is still classified as a frontier market by international investors. Like most other frontier markets, our market does not appear to be very efficient. In many cases, stock prices are driven more by speculation than by the fundamentals of our market. However, as the market grows and investors become more informed, the market should gradually become more efficient.

From this point of view, the year 2021 has been a bit disappointing for many observers. The market was driven by the speculative trends of a significant number of investors.

As mentioned in an article titled “The Stocks That Ruled 2021” in The Business Standard on December 18, 2021, some companies with questionable fundamentals were among the top performing stocks in 2021.

We hope that from 2022 the market will behave in a more mature way and we will have a more efficient capital market that can support our country’s goal of being a developed economy by 2041.

At the time of writing, on December 22, 2021, DSEX, the price index for all stocks on the Dhaka Stock Exchange was up 25% since the start of the year. How will the market perform in 2022? No one can predict it, mainly for two reasons.

First, the intrinsic value of a stock, as we saw earlier, does not depend solely on the dividend payouts over the course of a year. It depends on what companies are expected to pay over 30, 40, or 50 years or even longer. The money market situation is also very important because investors consider the opportunity cost of their money when investing in capital market instruments.

Second, as we saw earlier, markets are inefficient. Although investors can correctly estimate intrinsic values ​​of securities, market prices of securities can differ significantly from intrinsic value due to many non-economic or behavioral factors.

However, it is fair to say that we are entering 2022 with a lot of positive things happening in our country. Economic activities are gaining momentum after closures and restrictions induced by the pandemic. Exports and imports are increasing rapidly. Demand for workers has increased in countries that are the main sources of employee remittances for Bangladesh.

The efficiency and productivity of the country will increase significantly in 2022, as the Padma Bridge, the first metro and many other infrastructure projects are expected to be open to the public during the year. In addition, government spending on other ongoing megaprojects will stimulate the economy.

The money market is expected to remain stable. As the interest rates on bank loans have been capped at 9%, the Bangladesh Bank should ensure sufficient liquidity in the system and try to facilitate credit growth to the private sector. The Bangladesh Bank has indicated that it also does not want interest rates to be too low.

When interest rates were too low in some months of 2021, the Bangladesh bank reclaimed liquidity from the system by issuing invoices. They are expected to start again in 2022 if interest rates drop drastically.

The stock market is expected to grow in size and depth as there are some initiatives to get certain large companies listed. The secondary fixed income market is expected to expand from a very small current state.

Currently, only a few corporate bonds are publicly traded and the volume of secondary fixed income trading is very low. Some banks are issuing perpetual bonds to meet their capital requirements and these bonds are expected to be listed in 2022. Other corporate bonds and Sukuks are also in the process of being listed.

The Ministry of Finance, the Bangladesh Securities and Exchange Commission and the Bangladesh Bank are making great efforts to ensure the participation of individuals in the government bond market. Government bonds are publicly traded and initiatives are underway to facilitate the participation of individuals in government bonds through exchanges. These initiatives will create opportunities for investors in general to invest in risk-free government securities.

Market participants expect a renewed focus on improving corporate governance and financial disclosure standards for listed companies in 2022. Overall, 2022 is expected to be much better than 2021. for the capital market in Bangladesh.

Chahidul Islam. Illustration: SCT

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Chahidul Islam.  Illustration: SCT

Chahidul Islam. Illustration: SCT

Chahidul Islam is CEO, VIPB Asset Management Company Limited and Director and Past President, CFA Society Bangladesh


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