Bangladeshi markets to boom – eventually

Panelists at the Bangladesh Investment Forum were optimistic about the outlook for the country’s capital markets but their hopes are likely to take years to be realised.
Bangladesh capital markets panelists, from left: Christian Forthuber, SwissPro Invest; Abu Bakar Chowdhury, ASMA Capital; Abdul Mazid, Chittagong Stock Exchange; MKM Mohiuddin; Alamgir Morshed, Standard Chartered Bangladesh
Bangladesh capital markets panelists, from left: Christian Forthuber, SwissPro Invest; Abu Bakar Chowdhury, ASMA Capital; Abdul Mazid, Chittagong Stock Exchange; MKM Mohiuddin; Alamgir Morshed, Standard Chartered Bangladesh

Bangladesh’s equity and bond markets will offer foreign investors enormous growth and performance potential – one day.

That, in essence, is the message from the capital markets panel at the 4th annual Bangladesh Investment Summit held at the Ritz Carlton Hotel in Hong Kong on Tuesday.

The panellists, two of whom are former or current senior executives of the Chittagong Stock Exchange, discussed the development potential of the country’s stock market in particular.

“Bangladesh’s stock market is still in the emerging stage but following its developments [of recent years] it’s almost like a developed market,” said M.K.M Mohiuddin, the former president of the Chittagong Stock Exchange. “It’s a well-regulated place and I’d rather say it’s over-regulated at this stage. But this means good protection for investors; I welcome that.”

Mohiuddin pointed to the fact that the market capitalisation of Bangladesh’s two stock markets – based in Dhaka and Chittagong, respectively – stands at $141 billion.

“That’s only 24% of [Bangladesh’s] GDP currently,” he said, to illustrate its untapped potential. “You can see the prospects. If you look at India its stock market is worth over 130% of GDP.”

Mohiuddin said Bangladesh's stock exchanges still lacked some fundamental supporting factors. “Products like derivatives need to come in and are being thought of,” he told the audience. “We also need advice, solicitation, and help from international investors and fund managers on how to do this.”

He added that the relative lack of information about Bangladesh could offer investors potential opportunities not available in more sophisticated countries.

“The only thing needed to do business in Bangladesh is to know it,” he said. “It’s better to do business than in Singapore or Japan, as those are very competitive.”

Christian Forthuber, chairman of boutique Bangladesh-based investment adviser SwissPro Invest, added that plans are in the offing to add exchange-traded funds to the stock exchange.

“[The regulators] are working on the legal framework and there will be a first ETF to list on the Dhaka and Chittagong Stock Exchange,” he said. “But it’s not decided yet which index to replicate or which asset manager to use to run the fund. And equity derivatives are on the agenda but probably not before 2017.”

Foreign investor limitations

Forthuber said foreign investors comprise only 7% of stock market investments. He argued this small penetration was “an opportunity [for foreign investors] to look at Bangladesh as a growth market”.

Mohiuddin said the country needed a potential $40 billion in capital to be invested in power generation, transmission, and distribution projects, and argued some of this could be raised via equity markets. However, rules may need to be changed if foreign investors are to help supply such capital.

“One request I would make to make room for foreign investors is for them to do pre-IPO placements and also for them to apply in big bulk when IPOs are in the offing,” he said. “At the moment there are limitations.”

Other issues facing the stock market include its lack of certainty – and pricing inefficiencies.

Thomas Hugger, chief executive officer of Asia Frontier Capital, has about $13 million invested in Bangladesh. He said the stock market’s daily turnover is around $70 million to $100 million, “which isn’t bad.”

However, he noted that some locally listed mutual funds in the country trade at 20% discounts to their portfolio value, while others sit at a 30% premium. Why is this? “It’s not an efficient pricing market,” he said in response to a question from FinanceAsia, with a shrug.

“Bangladesh’s stock market is largely retail investor-dominated, which means it’s volatile,” added a head of business at a local brokerage. “I think it has a lot of potential but to be honest I don’t think that it’s likely to be fulfilled this year.”

Debt dilemma

Bangladesh’s bond market is far less developed than its stock market, Alamgir Morshed, head of financial markets at Standard Chartered Bangladesh, said.

“When you talk of the capital markets in Bangladesh, you predominantly talk about equity. The newspapers have two pages of research on stocks, including price quotations and market capitalisation [figures],” he said. “When you come to the debt markets, it doesn’t seem to be part of the capital market, even though it’s integral.”

Morshed noted that whereas the volume of outstanding bonds in Bangladesh is worth about 1% of GDP, the bond market in neighbouring Nepal is 9%, even though the country’s economy is one-tenth the size.

“There is a long way to go in development,” he said. “But there is huge support from the regulators, and as a foreign investor ourselves we want to participate in the growth of the sector.”

Morshed added that the government taka-denominated bond market has made some progress, although there has been very limited success with regards to international bond issues by Bangladeshi borrowers.

“At some stage [borrowers] need to access the dollar bond market, otherwise they won’t get the seven-year or 15-year money, which is important for [funding] projects like power plants, for instance.”

However, he admitted to FinanceAsia that progress has been slow. “There is so much liquidity in system that accessing bank loans is pretty easy, which is slowing growth in the bond market,” he said. “And many people don’t realise bonds can be tradable. There are no bonds listed in the stock market yet.”

Other sources

Other audience members said a major problem prohibiting development of the bond market in Bangladesh is the appealing funding the country often gets from other sources.

“I worked at the finance ministry and talked to the finance minister. He was upbeat about floating a sovereign bond but before we could do so we needed bankable projects,” said Arastoo Khan, adviser to Impress Capital and a former deputy secretary in the Ministry of Finance of Bangladesh. “But in Bangladesh whenever you think of a project you will get development partners, mostly from China, coming and saying ‘do you need money?’ So you forget about the bond issuance. Always people are coming and offering cheap financing.”

Morshed agreed with the sentiment but said the government’s apparent interest in issuing an international sovereign bond could act as a catalyst to bring attention to the bond market. Bangladesh has a Ba3 credit rating from Moody’s and a BB- rating from Standard & Poor’s.

“A sovereign bond has been a big discussion,” he said. “A sovereign bond gives visibility [to] Bangladesh in the global financial stakes and that opens doors to the global financial sector.”

However, others were more sceptical about the likelihood of such a deal, noting such plans have been discussed for a long time.

“Bangladesh has had sovereign bond plans for over five years,” noted a senior Bengali banker who had been observing the panel. “I think it’s far from certain they will come to fruition soon.” 

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