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The Future of Bangladesh Capital Markets

The Future of Bangladesh Capital Markets. www.AssignmentPoint.com. Executive Summary. Global Outlook. Recovery reflected in increasingly positive economic data Jobless claims at 10 month low, homebuilding and factory output on the rise in the United States

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The Future of Bangladesh Capital Markets

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  1. The Future of Bangladesh Capital Markets www.AssignmentPoint.com

  2. Executive Summary Global Outlook • Recovery reflected in increasingly positive economic data • Jobless claims at 10 month low, homebuilding and factory output on the rise in the United States • Growing exports, increasing manufacturing orders and retail sales in Europe • Slowing contraction and relatively low unemployment in Japan • Regional outlook is positive based on strong exports, domestic demand • 7.9% growth in China in Q2 2009. Industrial production up 12% YoY as of August’09 • 6.1% growth in India in Q2 2009. Industrial production up 6.8% as of July’09 Bangladesh Outlook • Bangladesh economy has been mostly resilient to global turmoil • GDP growth forecast to be 5.88% in 2009, comparatively strong in the face of global contraction • Low cost exports continue to be in demand • Strong remittance inflow from Bangladeshis abroad Bangladesh Capital Markets • Capital markets continue strong performance • Subprime crisis has left little impact on Bangladesh markets • Market capitalization is above US$20bn in 2009 from US$10bn in 2007 • Average daily turnover is approximately US$75mm in 2009 from US$24mm in 2007 Opportunities and Challenges • Key opportunities for future growth • Institutionalization of market brings greater liquidity and lower volatility • Attracting large corporates for listing provides investors with viable investment options • Challenges ahead • Retail dominated market resulting in higher volatility from speculation • Large, well reputed companies prefer to source funds from traditional bank finance against capital markets

  3. Global Markets and Economic Outlook

  4. The global economy is in the process of recovery with most major markets expected to grow in Q3 2009 Global Economic Outlook United States • Increasingly positive economic data indicates the US economy is beginning to grow • Jobless claims are on the decline, falling to 10 month lows. Unemployment remains high at 9.8% • Factory output and homebuilding are on the rise, wealth losses have declined • The S&P 500 has gained 57% since touching a 12 year low in March • Consumer spending is expected to remain slow, growing 1% in Q3 after gaining 2.4% in the previous quarter Europe • Mixed activity data in the European economies outweighed by stronger exports, rising sentiment indicators • Rising incoming orders signal manufacturing recovery in industrial powerhouse Germany • France is expected to extend growth into Q3, despite rising unemployment (9.1% in Q2) • Rising exports, housing, retail sales and business surveys indicate returning growth in the UK economy Japan • Election of new government in September 2008 expected to slow recovery as new policies are implemented • Real GDP declined 8.4% (YoY) in Q1 2009, 7.2% (YoY) in Q2 2009 • Contraction is expected at a slowing rate till Q1 2010 • Core CPI remained stagnant in Q1 2009, falling 1.0% in Q2 2009 • Unemployment rate rose from 4.4% in Q1 2009 to 5.2% in Q2 2009 Source: Citigroup Research, Bloomberg Bloomberg data as reported in October 2009

  5. Export driven growth and recovery momentum in US and Europe signal V shaped recovery in Asia Pacific Regional Economic Outlook China Shanghai Composite Index • Recovery continues at fast pace, driven by rising exports and strong domestic demand • Real GDP grew 6.1% in Q1 2009, 7.9% in Q2 2009 • Industrial production rose 12.3% YoY as of August’09 • Expected to grow 16% by the end of the year • Minor increase in unemployment rate • Urban unemployment grew from 4.3% in Q1 to 4.5% in Q2 2009 BSE Sensex India • GDP grew 6.1% in Q2 2009, following 5.8% growth in Q1 • Rainfall shortage expected to hit agricultural production • Industrial production saw robust growth of 8.2% and 6.8% in June and July 2009 respectively • 15% rise in food prices resulted in CPI growing 11.9% YoY • Exports declined 27.7% YoY till July 2009 • Exports contracted 10 months in a row Source: Citigroup Research, Yahoo Finance Index graphs as of October 9,,2009

  6. Bangladesh Economic Outlook GDP Growth (YoY%) • Remittance inflow has been resilient to global turmoil • Bangladeshis abroad sent home US$887.9mm in September’09 • Inflation continues to decline • Fell to 6.04% in July’09, from 6.66% in June’09 and 8.90% in December’08 • GDP growth forecast has been revised downwards to 5.88%, compared to 6.19% in the previous fiscal year • Exports have been relatively sheltered due to low cost nature of Bangladeshi products • Recovery in the US and Europe, the major buyers, expected to boost export earnings Inflation (YoY %) Export as a % of GDP Remittance by Region Source: Citigroup Research, Bangladesh Bank

  7. Bangladesh Capital Markets

  8. Bangladesh Capital Markets Performance Performance of Local Indices (2009YTD) IPO and Direct Listing Issuance (YTD) Daily Trading Volume Graph Key Commentary • Local market has been relatively sheltered from the recent global meltdown in 2008 • Market was volatile in early 2009 but has stabilized with high turnover and market capitalization • FII interest to explore new front • Impressive growth in liquidity in recent years • Average Daily Turnover increased from US$24mm in 2007 to US$ 75mm in 2009 • Highest recorded liquidity of US$166mm on July 2, 2009 • Market Capitalization of DSE in 2009 has been around US$20 bn, up from about US$10 bn in 2007 • 15 new issues in 2008 with 3 direct listings • 7 new issues completed in 2009 • Recently completed largest IPO in Bangladesh history Bangladesh Relative Liquidity Source: Dhaka Stock Exchange website as of October 2009

  9. There have been strong deal issuances in 2008 and 2009 despite weak global market conditions. Most of these have seen strong price performance since listing. Recent Bangladesh Issue Performance Source: Dhaka Stock Exchange. As of October 2009 Note: In case of direct listing, refer to as offer price.

  10. Several private and public sector issuances are expected in 2009. Bangladesh Issuance Overview Visible Transaction Pipeline Private Sector (IPOs) Public Sector (Direct Listings)

  11. Capital Markets – Opportunities and Challenges

  12. Bangladesh Capital Markets – The Future Institutionalization of the Market • We expect to see more institutional investors bringing long term commitment and liquidity to the market • Longer investment horizons reduce market volatility • Institutional investment strategies are fundamental focused rather than speculative Listing fundamentally sound, well-reputed companies • With the improvement of corporate governance, we can attract sound corporates to come to capital markets • Quality scrips provide liquidity and motivation for educated investors to participate in capital markets • Listing of large, reputable corporates attracts foreign investments, increases liquidity • Introduction of new scrips in different sectors provides investors with broader options • Recent addition of telecom sector likely to generate interest among other large cap companies to list • Inclusion of well reputed, large cap companies will reduce ability of select “investor syndicates” to manipulate prices Flotation of Mutual Funds • Strong pipeline for listing of mutual funds (US$300mm in mutual funds expected to enter the market by mid 2010) • Provide retail investors with safer, indirect market access, preventing wealth & capital losses • Reduces dependency on retail investors, allowing institutions to bring commitment and stability to the market • Bring much needed market stability that only institutional investors can provide Facilitation of Private Equity Investments • Recent introduction of certain foreign private equity investors in Bangladesh • Provide stable flow of capital given mid to long term investment horizon of PE investments • High risk hurdles and selective investments direct PE funding to quality local corporates Inclusion in Global Indices • Bangladeshi companies are now included in global indices • The Dow Jones SAFE Index already includes 5 Bangladeshi banks and a power company • Inclusion of high quality scrips in the index can result in inclusion of our index in global indices such as MSCI Emerging Markets, etc

  13. Recent Regulations and Opportunity Space Strengthening of Surveillance • Following the stock market crash of 1996, measures have been taken to prevent future incidents of the sort • Constant market surveillance by the SEC • Increasing standards of corporate governance • Demat Trading • Focus on investor education – establishment of Capital Markets Institute Introduction of BASEL II Guidelines • Introduction of BASEL II guidelines by Bangladesh Bank likely to encourage banks to raise capital through debt instruments in 2010 • Issuance of debt and equity by banks through capital markets likely to generate increasing liquidity Introduction of Book building / Price Discovery • Introduction of book building is a big step towards developing Bangladesh capital markets • Book building reduces risk of undervaluation for issuers • Ensures fair pricing by factoring in demand, likely to encourage listing of large, well-reputed companies • SEC qualifying conditions for book-building set certain criteria for companies to be eligible Infrastructure Development through Capital Markets • Focus on infrastructure development may see Government of Bangladesh (GoB) seek capital markets as an avenue for financing • GoB plans to issue BDT 5.0 bn (US$72mm) in securitized bonds to fund Bangabandhu Bridge • Cabinet approval for the issue of BDT 42 bn (US$650mm) in bonds to fund Padma Bridge likely • Plans to construct second bridge over Padma at a cost of US$1.89bn signals potential financing needs • Further GoB funding requirements arise from needed development in the power sector and development • of roads and highways

  14. Challenges Ahead Information Asymmetry • Access to credible information is restricted • Retail investors lack dedicated investment process infrastructure • Forced to look to brokers for advice that may consist of market rumors • Syndicate of large investors manipulate the market through price inflation, pump and dump strategies Supply Side Constraints • Lack of fundamentally sound scrips as companies prefer traditional bank finance to capital markets • Need to encourage listing of good scrips in the market • Reducing supply side constraints generates liquidity, reducing scope for price manipulation Lack of Professional Portfolio Management • Ratio of institutional-to-retail investors remains low • Institutional investors bring stability through non speculative long term investments • Listing of more mutual funds can be a starting point to increasing institutional activity Valuation Disparity • Value of scrips is subject to speculative trading rather than sound fundamentals, resulting in market volatility • Education of investors, overall development of capital markets through time can address this issue Lack of a Formal Debt Market • Bangladesh does not have established secondary debt market • Markets are unable to provide short term financing solutions to corporations, i.e., commercial paper • Listing of debt instruments from quality issuers and institutional trading can increase activity • Introduction of BASEL II guidelines by Bangladesh Bank likely to encourage banks to raise capital through debt instruments in 2010 Quality Research and Analysis • Development of quality equity research in the country is yet to match the growth of local capital markets • Quality research increases investor awareness, reducing speculative trading and market volatility Central Co-ordination of Regulators • Top down co-ordination between Bangladesh Bank, SEC and related bodies would: • Streamline regulatory processes • Reduce time required for quality issuers and new capital markets products to reach market

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