INDUSTRY ANALYSIS (SWOT)

The equity capital market of Bangladesh is overshadowed by recent market failure and investor mistrust. The industry has often been considered highly volatile by industry experts and specialists. The market has sometimes been marred as highly unpredictable because of high uncertainty involved with market returns and overall risk perspective. Interviews with the executives from different equity firms currently operating in the capital market of Bangladesh has revealed some key characteristics of the market. Following is an industry analysis covering the strengths, weaknesses, opportunities and threats of the industry. STRENGTHS

Protection for Foreign Investors

Frontier Market Status

Protection for Institutional Investors

High Return and Growth

Government Facilitation

Hedging against Global Risk

1. Protection of Foreign Investors: Over a dozen of foreign hedge/frontier funds are operating in the capital market in Bangladesh. One of the reasons behind their investing in here is that Bangladesh Government is strictly concerned about the capital safety of these foreign investors. This protection gives a competitive leverage to these foreign investors when market failure is apparent because investors are able to generate high positive excess returns over a significant time frame.

2. Protection for Institutional Investors: Bangladesh government is more concerned about protecting the institutional investors (e.g., commercial banks, insurance companies) than about individual small-scale investors. Because institutional investors are actually managing their investment generated by deposits/premiums of thousands of small-scale individual investors, the government gives the top priority while protecting investors from massive market failure. In the most recent market crash in 2008, Bangladesh Government protected the commercial banks by offering them opportunities for safe liquidation of assets from the capital market. 3. Government Facilitation: Foreign hedge/frontier funds want to have a long-term exposure to the capital market of Bangladesh. From that perspective, foreign hedge/frontier funds are more important than individual small-scale investors who invest from a short-term perspective. The

government facilitates the long-term foreign investors by giving them protection and safe capital preservation. 4. Frontier market status: JP Morgan has given a Frontier Five status to Bangladesh considering its above-average growth opportunities and potential for higher positive excess return from a long-term perspective. Bangladesh has also been given an Emerging Eleven status in another research report published by Goldman Sachs. 5. High Return and Growth: The fact is globally investors now have very limited opportunities to earn high positive excess returns by investing in assets belonging to the developed countries around the world. This is why investors have a tendency to move their capital into a less structured environment where there are still opportunities of massive development and returns resulting from that. Bangladesh is offering that kind of opportunity to the foreign investors. 6. Hedging against Global Risk: Even when the entire worlds economy faced a recessionary hit in 2008, the capital market of Bangladesh was still in a robust growth state. In fact, the market was at that time becoming a bull market. This fact proves that the Bangladeshi capital market can be a better hedging investment location for the global investors because even when the world is in recession, Bangladesh offers sizable opportunities of growth. WEAKNESS

High Volatility

Day Trading

Market Rumor

Lack of Entrepreneurs

Lack of Experts

Following Practice

Lack of Investor Knowledge

Premature Surveillance

Lack of Research

Syndication

Lack of Trust

Low Regulatory Oversight

Insider Trading

Market Manipulation

Lack of companies' goodwill

Weak Infrustructure

1. High volatility: The major weakness of the capital market of Bangladesh is its sensitivity to high unpredictability of returns. High volatility also means that investors will be entitled to high returns also. But it has been evident from the recent market failure that the risk profile of Bangladesh is quite high. This high risk often makes the investor base vulnerable to massive losses. The fact is also concerning when the loss has to be borne by investors who invest in the market for the first time or who is not responsible for any market bubble. 2. Lack of expert manpower: There is a lack of qualified and resourceful human capital base. In most of the companies operating in the capital market, there are no efficient bases of human capital for which operation of the entire market is often inefficient and depends on rumor news. Besides, lack of expert manpower also means that investors will not be able to get quality and relevant information about the capital market in time. There also arises another problem when investors want some advisory or consultancy services from the manpower concerned. 3. Lack of equity research: The market is not driven by research knowledge. So, equity firm employees are not encouraged to do relevant research on the listed securities. This is the primary reason for which the employees working in equity firms cannot deliver the investors with investment ideas from a long-term perspective. Fear exists among those investment employees that if they give some long-term advice about investing in a security to the clients and after that the price of that security falls, the clients might think that they are not capable of handling advisory role successfully. 4. Insider information and Insider Trading: The entire market is said to be driven by insider information and insider trading. Employees working in the equity firms are said to be involved with insider trading as they have adequate prior knowledge and ideas of different press releases. These sorts of prior information have made them able to able to front-run general investors by buying or selling securities much ahead of the investors. 5. Manipulation by Institutional investors: Recently, the merchant banks have been blamed by experts from all corners as they have involved in massive-scale market manipulation. These merchant banks have artificially manipulated the market in favor of their institutional investors by Omnibus accounts which cannot be tracked by SEC on an account-by-account basis. Other sorts of market manipulation (e.g., block trading) are also responsible for sudden rise or fall in particular securities. Asset management firms sometimes artificially inflate the share price by issuing bonus/right shares which have no economic reason to justify. 6. Syndication: It has recently been reported in some dailies that institutional investors form syndication with equity firms so that the former can get the competitive advantage over retail investors. This unequal status of investors all through the market has prompted further market inefficiencies in the market. 7. Herding and following practice: There is no fixed pattern of investment by retail investors as they do not invest from a long-term perspective. Their short-run investment is triggered by

following few large-scale investors who can control the entire market by controlling the demand and supply situation of securities. Retail investors primarily follow the existing market pattern. When a particular stock goes down, they immediately try to liquidate their investment and are thus faced with losses. 8. Day trading: Most of the investors are said to be day traders, meaning that they do not invest from a long-term perspective rather they try to gain profits from day-to-day price movement. This day trading is primarily responsible for unpredictable movement of the market that happens in DSE. 9. Market rumor: Apart from insider information, market rumor has been significantly responsible for the overall market inefficiency. Retail investors often get trapped into market rumor and try to liquidate their investment, resulting in a significant amount of loss. 10. Lack of investor knowledge: Most of the investors are not much educated. Lack of investor knowledge about particular securities and the overall mechanism of the market is responsible for unpredictable market movements. Because investors do not have sufficient knowledge and expertise, they are not capable of investing from a long-term perspective and thus they have to depend on their brokers when an investment decision has to be taken. 11. Lack of investor trust: Excessive market volatility has made many retail investors reluctant to invest in the market for long. Lack of investor trust is one of the reasons for which the market is now stagnant and less liquidity has become a persistent problem. 12. Lack of major companies reputation: Investors do not know which equity firms are better capable to serve them and guide them throughout their investment horizon. In fact, there is not a single equity firm in Bangladesh which has prohibited their employees from trading on specific securities. For this reason, investors are disadvantaged to a high extreme because the employees at equity firms can execute their own propriety trading far ahead of the investors themselves. 13. Weak infrastructure: Bangladesh stock market has not been able to provide an adequate infrastructure base for an efficient operation of the market. Limited technology use coupled with lack of efficient manpower has made the overall infrastructure very poor compared to that of other countries. It has also been reported that the algorithm that is followed to determine DSE index is flawed and this is why investors sometimes get concerned over price movements which are actually not significant. It has also been reported that DSE index is not adjusted for splits, bonus shares, rights shares, repurchases and other market activities effectively. 14. Low regulatory oversight: The SEC is the controlling body of the entire equity capital market of Bangladesh. Till date, the regulatory oversight that the entity has tried to implement into the system of the market has not been successful because of massive loopholes and scopes of non-compliance. Besides, frequent changes in stock market rules and regulations are responsible for further complication of trading in the market.

15. Unwillingness of good companies to be listed: The supply of good and quality securities in the market is not high. Till date, most of the multinational corporations have been away from the stock market. This sort of unwillingness to be listed in the stock market is a hindrance for the long-term growth of the entire market. 16. Subjective price quotation during IPO process: Currently, the prices for securities during an IPO are calculated on a purely subjective basis. Decisions regarding premium often depend on the subjective arrangement between companies and issue managers. 17. Lack of sophisticated financial securities: Unfortunately, Bangladesh is still far away from implementing a financial system incorporating relevant financial securities. There is no active secondary t-bill market. Besides, there is no corporate bond market and derivates are not yet brought into the system. Some sophisticated actions like short sell is not yet introduced to the system. All these make the investment into the capital market of Bangladesh a nightmare. OPPORTUNITY

Considerable Economic Growth

Growing Base of Investors and Experts

Regulatory Effort by Government

Positive Future Outlook

1. Considerable economic growth: Though stated as a third-world economy, Bangladesh has seen a considerable GDP growth (i.e., around 5%-6%) in the last couple of years. It will be possible to earn high returns if the overall capital market can be correlated with the broad economy. This will only be possible if the investors will make considerable effort to conduct due research for each listed entity before investment in its shares.

2. Regulatory effort by the government: The government surveillance system is still unable to develop the entire market system. However, the government is now trying to change the current scenario incorporating the need of an efficient market structure and adequate market oversight. 3. Positive future outlook: Goldman Sachs has reported in a seminar that it will come to invest in Bangladesh in 2-3 years as the future prospect of the countrys stock market and the overall economy looks promising. 4. Growing base of investors and experts: Because of inability of Bangladeshi citizens to invest in safe investment instruments of other countries, stock market will be a promising investment haven for investors within the next decade. Because banking industry is already saturated, investors might look for other investment opportunities and therefore, there remains a

higher possibility that a growing base of investors will be investing in the capital market in future. THREAT

Competition with other Frontier Markets

1. Competition with other frontier markets: Frontier markets like Sri Lanka and Pakistan are far ahead of Bangladesh in implementing an efficient market because of technical as well as human resource base. Bangladesh may not be able to attract of adequate foreign funds if these other markets look much more profitable in the long run.

2. Possibility of further price bubble: The geographic limitation of Bangladesh is one of the major problems that make ways to price bubbles. Because investors do not have much wide scope for investment, they end up investing in a concentrated base. This leads the way to price bubble and subsequent market failures. So, investors might avoid the stock market for a long period of time. Possibility of a Price Bubble