Beyond Boom-And-Bust

The Dhaka Stock Exchange is witnessing a bull market at the moment, that has sustained for quite a while, with the key index DSEX up above 5800 again for the first time since 2010, having bottomed out in the low 3000s in 2013.

That in itself is possibly news that would make a lot of people nervous, given two recent occasions on which the stock market was steaming ahead, attracting a lot of investors, only to end up crashing.

The first of course was in 1996, the fallout from which continues to this day. A special tribunal set up to dispose of the cases related to the 1996 scam issued arrest warrants for two former directors of a brokerage firm towards the end of July.

The index itself was newly launched after the last crash towards the end of 2010, in which some 3 million investors are said to have sustained losses. And on August 1, after sell-offs in the previous two sessions amid an increased participation of investors, the key index hit a fresh all-time high as the share prices of banks and non-bank financial institutions soared. The key index of Dhaka Stock Exchange, DSEX, advanced by 1.01 per cent, or 58.60 points, to close at 5,860.64 points on that date after shedding 22.37 points in the previous two sessions. The benchmark index reached its highest position since its launch with 4,055 points on January 28, 2013. This was in the aftermath of the second crash in 2010.

Following a bull run during most of 2010, the main Dhaka index fell by about a half from its December 2010 all time high, corresponding to a loss of about 22% of gross domestic product (GDP) as of October 2012. The market correction wiped out $27 billion in market capitalization and, with it, bankruptcies, savings, and jobs, triggering a wave of social discontent. The ensuing liquidity crunch led to heightened solvency risks. Indeed, given the interconnectedness between banks and equity markets, there was grave concern that a perfect storm could result in a negative feedback loop from the financial sector to the real economy, potentially bringing the economy to a grinding halt.