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Shallow market rings alarm

Sarwar A Chowdhury
A rising trend in the market capitalisation, without adequate depth, rings an alarm for the stockmarket.
The market capitalisation is an indicator that usually shows the depth of a stockmarket if compared to the economy. But it can also be used to determine whether an overall market is undervalued or overvalued, and the capitalisation in the Dhaka market shows that it is overheated.
The total market capitalisation to GDP ratio now stands at 47 percent, up from 40 percent in July this year. Analysts said, this is a sign, which shows that the market is gradually overheating and heading towards an alarming position.
The GDP (gross domestic product) at the current price has been estimated atTk 6,90,571 crore at the end of fiscal 2009-10.
The Dhaka market rose yesterday for a third consecutive session, and the benchmark index — DSE General Index — also reached its highest level at 7,513 points.
At the end of yesterday's trading on the Dhaka Stock Exchange, market capitalisation stood atTk3,25,394 crore.
Market capitalisation represents the aggregate value of companies or stocks. It
is obtained by multiplying the number of shares outstanding by their current price per share.
The analysts said the market capitalisation is on the rise not because of the entry of new securities, but due to a consistent rally in share prices, influenced mostly by rumours and speculations amid a liquidity influx.
They said the market capitalisation should increase through the entry of new securities, instead of being based on soaring share prices.
The growth in the share price-based capitalisation is neither a good sign for the market, nor sustainable. When the market absorbs a new issue, or the existing listed companies pay out bonus dividend or offer rights issues, the capitalisation goes up.
"As the share prices are soaring, the capitalisation is increasing," said Salahuddin Ahmed Khan, former chief executive officer of DSE.
"But, it is a matter of worry that the growth is based on share prices instead of new securities, and it will change when the market will see correction in share prices," he said.
sarwar@thedailystar.net