Bangladesh: Dabbling in Dhaka Stock Markets

A classic stock market boom-bust cycle is underway in Bangladesh, inciting riots after the closure of the country's main markets in Dhaka and Chittagong this week.  The picture painted by the charts and reports from Bangladesh make for an abject lesson in how markets fluctuate and are driven by salesmanship and sentiment.

The chart below demonstrates relatively stable conditions in the Dhaka Stock Index until a surge of buying in November of 2009 (Point "I") across all sectors in the market formed the catalyst for a year of bullish sentiment which drove markets ever upward.  At the time Point "I" also represented an all-time high for the market:

Chart Analysis by Phil McGavin

The peak at Point "II" on the chart represents mid February, 2010, a point in time at which stockmarket prices were already double what they had been a year before that point in February 2009.  At this time an article, Stock Market: A Ticking Time Bomb, appeared in the the Bangladeshi publication The Financial Express, discussing the phenomenon: "The surge in the price index and the associated increased market volatility, somehow reminds us about the boom and bust of 1996. A sudden influx of funds and a surge in retail investors are pushing the DSE index forward without regard to economic fundamentals...Currently the market is entirely being driven by mob frenzy, and how long this will continue is to be seen."  The article discusses M2 inflation and an influx of new and uneducated investors and margin traders as the forces behind the accumulation and higher valuation of the market's stocks, resulting in the week-to-week setting of new highs.

Point "III" on the chart represents the peak of the euphoria, which was reached in the first week of December 2010, roughly a month ago. From there prices have fallen at breakneck speed.

During the period between Points "I" and "III", ordinary Bangladeshis became enamoured with the ongoing success of the stock markets, as they watched the value of their cash savings gaining only on marginal interest.  Average Bangladeshis also understood that their savings were losing value as a cause of the severe boughts of inflation they were experiencing in food and fuel prices.  Throughout this time, investment retailers and banks, similar to those we have in the West such as CIBC Wood Gundy, the Cooperators and Edward Jones to name a few, were able to paint the market as a secure vehicle for savings and earnings as they could present data and charts which showed values and returns on an uninterrupted upward trajectory.  They made a great deal in fees and commissions by helping millions of ordinary Bangladeshis get into the market.

However, exactly as happens everywhere else, most ordinary Bangladeshis as well as the low-level investment package salespeople working for the Retailers and Banks, did not know that the Banks and Investment firms themselves were already placing sell orders at the predicted tops in the same sectors and stocks they were still enticing people to buy and earning fees on.  These large institutions correctly recognised that soon there would be no significant amount of investors or capital left to purchase further stock and continue to drive prices upwards.  They also recognised that the mindless mass-purchasing of the stock market (that they helped to create) had driven prices well beyond their fundamental value.

On Dec. 5th, a major process of unwinding began as large investors and banks began to "book profits," which is economic jargon for realising cash gains by liquidating an asset.  Even during this time less prudent Bangladeshis were still offering to buy stock at prices which had the smart money hitting the sell button.  One by one these large stock holders began to unload, and in the glut of selling prices have tumbled since early December to Monday's low.  On that day, the entire Dhaka exchange index lost 9.25% percent inside an hour, before authorities halted trading to prevent a complete collapse of the market.  The BBC reports that "police used tear gas and baton charged investors who had attacked government buildings in protest at collapsing share prices" on Monday.  Such a sharp decline likely represents a sudden awareness by many more market participants that the markets are still overvalued, and they are thus either exiting the markets or unwilling to invest in it further.  More unfortunately, it represents the self-fuelling effect of automatic execution stop/sell orders and margin calls which were triggered as prices fell, which added to the momentum of the selling frenzy.  It was this automatic and self-perpetuating triggering of sell orders which caused authorities to suspend trading on the exchanges.  The massive dip and its triggering of stop/sells and margin calls has forced book-losses on many ordinary investors, who are for the most part poorly advised and educated as to how to compete in financial markets.  

Chart Analysis by Phil McGavin

The chart to the left shows the market from just this past August until now.  "III" is the same December 5th point as that of the previous chart, the ultimate high of the market, which was 8918.5.  Point "B" is the low of 6499.5 which was formed after trading was suspended this Monday, January 10th.  While such is an astounding loss of 28.2%, this only reflects movements in the stock index, which is itself an average of the values of all stocks on the exchange.  Many investors have realised losses far worse than this as their exposure to the market is in only a number of stocks thereof; many individual stocks performed far worse than the market average.  Usually such stocks are held primarily by uninformed investors who purchase baskets of stock packages and mutual funds from retail investment firms.  These are the people rioting in the streets and claiming that they have lost most of their savings.  Though the index did recover to above 7500, it is clear that this is to a level which is still not above the upside of a forming downward channel. That levels in the index were restored to where they were a few days before Sunday and Monday's panic does not change the fact that sentiment has turned against the market and that prices are likely to continue downwards even faster than the extreme manner in which they rose, to levels which are below actual stock values.  These fluctuations will see many middle class people in Bangladesh wiped out and starting from square one in a country where there is no social safety nets and whose lowest common denominator is homeless refugees of the past years' repeated monsoon floods.

The ongoing Bangladeshi Stock Maket unravelling is a real-time view into the anatomy of a market bubble, and yet another of example of why people everywhere must be weary of investing in markets they do not understand.  To invest in any market is primarily a speculative business decision, not a method for retirement savings.  One should not undertake to do so without some education and limited experience of their own.  Furthermore, one should be leary on handing over their hard earned money to brokers and investment retailers whose organisation's primary interest is fees and commissions; organisations who are not regulated from betting against their own advice; advisors who in large part have no experience or earnings in stock markets and whose education is limited to brief certificate programs at community colleges which merely familiarize them with basic economic terminology and theory.  


Read the Financial Exchange article from Point "I", December 1, 2009:
http://www.thefinancialexpress-bd.com/more.php?news_id=85612

Read the "Ticking Timebomb" article from Point "II", February 19, 2010:
http://www.thefinancialexpress-bd.com/more.php?news_id=92946

Read about the Riots:
http://www.bbc.co.uk/news/business-12149340
http://www.bbc.co.uk/news/business-12162039