The growing level of interest has prompted equity derivatives desks at the big investment banks to start offering hassle-free ways for investors to buy into the Dhaka stock exchange. Deutsche Bank yesterday launched an institutional platform, aXess Bangladesh, and Citi started offering such access trades last May.
Investors who bought the index at the start of 2007 pocketed an 87% return by the end of the year, compared to a 38% return on the MSCI Asia ex-Japan index. Just four years ago the Dhaka stock exchange was worth only $1.7 billion and daily turnover was barely $1 million. Today, the market is worth $10.6 billion and turns over almost $20 million a day û still tiny, but growing fast.
"Bangladesh offers an exciting alternative to other high-growth Asian markets," says Ben Chandler, Deutsche's head of synthetic equity sales in Asia, who adds that the exchange is modern and fully automated. "It provides an efficient market for foreign investors."
And a friendly one too. Bangladesh is more open to foreign investors than many of its neighbours, with full foreign ownership allowed in most industries and no capital gains tax.
The economy grew 9.3% in 2007 and has averaged growth of 7.3% during the past five years, thanks largely to the success of the country's garment industry. For that growth to continue Bangladesh needs to build better transport links and more power stations, and to fund that investment it needs to attract overseas investors into its stock market.
Access products such as the ones launched by Deutsche yesterday will make it easier for those funds to flow into the country. Using equity derivatives structures û participatory notes, zero-strike warrants, total return swaps and so on û investors can get a synthetic exposure to stocks on the Dhaka exchange or the index itself.
These types of products are not particularly risky in themselves, but Bangladesh is still a dicey place to invest. Liquidity is thin, the market is small and the economy is heavily reliant on agriculture. Like most indices in the region, Dhaka has traded down in January and during 2007 it was very closely correlated to other markets in Asia, but Deutsche strategists say the market is still worth a look, particularly for small-cap investors and those in the private equity and infrastructure sectors.