SME stocks soar in tepid market
As key Dhaka Stock Exchange (DSE) index falls and turnover slumps, SME index soars for an influx of investors lured by ‘risky’ stocks on speculation that they would rise further.
The DSE SME Index jumped around 170% to 1,573 points in the past month, data from the Bangladesh First Stock Exchange showed on Tuesday.
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The DSE-SME, a small cap advisory, was rolled out on April 30, 2019, so that small and medium-sized enterprises (SMEs), with paid-up capital between Tk 5 crore and Tk 30 crore, can qualify for financing of the stock market.
Considering the risk of SMEs, the Bangladesh Securities and Exchange Commission (BSEC) has not allowed general investors to trade on the new board without prior approval. The investment requirement has been set at Tk 50 crore.
But due to the absence of general investors, stock prices of SMEs had remained low and most shares were in the hands of institutional investors.
This prompted the BSEC in February to relax the requirement, stating that if an investor has an investment of Tk 20 lakh, he will not need to take permission to trade on the SME board and he will be eligible to buy shares automatically.
This gave institutional investors the ability to sell the shares to general investors.
“The board of directors of SMEs can become a source of concern for investors in general, just like small closed-end companies posed in the main market,” said Mohammad Saiduzzaman, an investor who has been in the market since 2009.
As the number of SME shares is low, investors believe the share price will rise further and so they buy the shares, he added.
The SME index began to soar after the BSEC implemented the new rule. However, the main DSE index remains weak.
Over the past month, the DSEX, the benchmark index of the Dhaka Stock Exchange, has lost 62 points. Turnover fell to last year’s low at Tk 490 crore on Wednesday.
“Investor participation was low in the SME market and the BSEC decision changed the situation,” said Md Moniruzzaman, Managing Director of IDLC Investments.
However, the pattern of trading on the SME board seems unusual, as a 15-20% daily increase in shares is not justifiable, he said.
“The regulator should take care of it.”
The SME council has nine companies. Prices for most stocks have more than doubled over the past month.
For example, stocks of Apex Weaving and Finishing Mills soared 319%, Nialco Alloys 290% and Wonderland Toys 218%.
“It could confuse investors if they invest in these stocks without doing any analysis, as some of the companies in the SME board are from the over-the-counter (OTC) market,” Moniruzzaman said.
Companies had been sent to the OTC market for disappointing performance and remained there for many years.
Moniruzzaman agrees that SMEs have potential, but they still need to be tested.
“So investing based on speculation may not be a safe option.”
Sayadur Rahman, chairman of the Bangladesh Merchant Bankers Association, says participation from general investors has increased after the BSEC cleared up the complexities of entering the market.
As the number of SME stocks is low, stock prices have risen rapidly, he said, urging investors to be careful with their investment.
“If investors aren’t careful when buying stocks, it will hurt them and the market.”
SME stocks were undervalued, but have now reached a standard level, so stocks could turn flat now, said BSEC spokesman Mohammad Rezaul Karim.
Normally, SMEs and technology companies carry more risk, so investors should be careful, he said, adding that where the risk is high, the return is also high.
“So investing should be research-based.”
Bearing this in mind, the BSEC has not allowed all investors here but only those who have a minimum investment of Tk 20 lakh, added Karim, who is also an executive director of the stock market regulator.
Due to rapidly changing prices, SME stocks could go up or down 20% in a single day. Seeing the continued rise, the BSEC decided yesterday to lower the circuit breaker to 10%.