Economists on Monday said the record fall in stock markets that took place in the last two days was inevitable as value of shares had gone up irrationally.
They blamed too much focus of banks in stock markets and manipulations by insider trades were mainly responsible for the bubble in the market that allured innocent investors.
‘It is a typical case of bubble bust,’ said Ahsan Mansur, Executive Director of the Policy Research Institute.
He felt that price correction in stock markets would continue further as by Monday the market had come to just half the way considering the level of rational correction.
Ahsan pointed out that average valuation of stocks up to 10 to 15 times of the price earning ratio is rational and sign of a healthy market. But Bangladesh market, Ahsan said, had been overvalued by 34 times of PE ratio and even after correction by Monday, it came to down to 24 times level.
Excess liquidity and over concentration of the banks on stock market were the main reason of creating this bubble, he said.
‘Market will come to its own equilibrium level,’ he predicted, opining that the government may try to arrange a soft landing of the market, but warned that the measures might not work. ‘Better late than never—it is rather good that the bust has taken place earlier.’
Ahsan, who had been the chief of IMF operations in Middle East, said in 2006 stocks in the Gulf countries had faced a similar situation and even the rich Arab governments did not or could not prevent the fall of their markets.
He however hoped that after correction takes place institutional investors would come back propelling the market. ‘Even the foreign investors will come.’
The economist said still it was not clear as to how much investments the banks had made in stocks directly or indirectly and hence the impacts on banking sector would remain a major concern.
He advised the government for keenly monitoring the banking sector now and provide necessary supports to keep them properly functional. “It is true that the banks’ too much involvement in stocks market was undesirable.’
Echoing Ahsan, economist Quazi Kholiquzzaman Ahmed also said that over focus of the banks on stock market was the main reason for its abnormal rise.
‘Thoughtless rush of investors to the stock markets created the bubble this time and manipulators who did insider trading really instigated the innocent investors to be suicidal profit mongers.’
‘Syndications of unscrupulous traders are responsible for distortions of the market,’ said Ahmed, suggesting that the government should strictly implement the rules and regulation of stock market.
Government, media and other social stakeholders have responsibilities in creating awareness among the general people about risks and necessity of thoughtful investments.
Ahmed also suggested that the government should bring potential private companies into stock markets and unload shares of the state-owned companies to keep a demand/supply equilibrium on the market.
‘Over focus of the banks on stock markets inspired other institutional investors and a sharp rise on the value of stocks enticed small investors into market,’ said, Zaid Bakth, research director of the Bangladesh Institute of Development Studies.
He said the government and Bangladesh Bank are greatly responsible for the fomenting the bubble in the market.
‘The government decision during current budget declaration to allow investment of black money on stocks was wrong and undesirable,’ he said.
‘Why did not the government think that investing money in secondary stocks is really not productive for the economy but only instigates rise on inflation,’ he said.
Bakth said, Central Bank had information a year ago that commercial banks had been investing excessively on the stocks but it did not take timely preventive measures.
He pointed out when a sentiment took strong hold three weeks back that the central bank was becoming tough against the commercial banks who made huge profits from the stock market last year, they started coming out from market, thus created a panic there.
Bakth apprehended that some price correction still remains to take place and later on the institutional and individual investors, who made good profit earlier, would come back to the market.
Small retail investors were loosing money badly and they would remain the worst victims in the long run, he said sadly.
