Dhaka Stock Market is Asking for Trouble Yet Again

 

Bangladesh Stock Market

Dhaka Stock Market is Asking for Trouble Yet Again

April 10, 2012

On February 6, 2012, I noted that the Dhaka Stock Market was nearing its bottom. Around that time the DSE General Index hit a low around 3,500. After about two months and a few days, the DSE General Index now stands at around 5,200, that is, about 50% higher than its recent low of around 3,500.

The end of ceaseless bleeding in February and the rise since then has provided much needed relief to investors who survived the brutal downturn. However, in my humble opinion, the pace of the Dhaka Stock Market rise is once again reaching unsustainable level and could usher in another ruthless round of volatility and possibly another sustained down phase. It is difficult to imagine what new and significantly positive economic fundamentals would rationalize such a fast pace of recovery in the market. In the absence of tangible and significantly positive economic drivers in the days ahead, the ordinary investors once again risk losing whatever remains of their sharply drawn down equity.

Interestingly, while the authorities were frantically (and erratically in my view) instituting all kinds of measures to arrest the down turn by way of creating artificially inflated demand for stocks, the same very expansionary measures may turn out to be the principal cause of creating a bubble yet again only to be busted down the road. While re-emergence of confidence in risk taking is healthy, excessive or irrational risk-taking is not and in fact is the certain road to disaster. As I mentioned on February 8 and 9 posts, the preceding bubble was in significant part created by excessive margins and consequent leverage. In the midst of trying to stop the free fall, the authorities have in fact manufactured an even more explosive leverage situation now than before. As always, prevention is better than cure. In other words, the best remedy for avoidance of market crash is to prevent a meteoric rise in security prices that is not rooted in broader economic fundamentals and profitability of the business sector.     

-- MC