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Market PE hits 5-yr low

Sarwar A Chowdhury
The market PE (priceearnings) ratio has come down to almost five-year low to 14.59, a level that indicates that the stockmarket has become less risky and more attractive for investment.
After December 2006, the PE ratio came to this point for the first time due mainly to a continuous downtrend in share prices.
At the end of December 2006, the overall market PE stood at 14.51, according statistics available from Dhaka Stock Exchange, the premier bourse.
The PE ratio determines the time an investor needs to wait to get back the invested amount. It is an indicator for considering the extent of risks an investment might entail.
The PE ratio means a valuation ratio of a company's current share price compared to its earnings per share.
The indicator is also important to better understand what happens in the market after a large gain or decline. It is also one of the best gauges to know how expensive or cheap the overall stockmarket is at a certain moment.
“Although the existing PE ratio suggests that the market has become attractive for investment, it cannot draw the investors' attention,” said Prof Salahuddin Ahmed Khan, who teaches finance at Dhaka University.
The continuous downward trend not only pulled down the PE ratio to a record low, but also eroded the investors' confidence, he said.
“Many of the investors got stuck with margin loan, while others are not injecting fresh money into the market seeing no hope,” he said, adding that most of the institutional investors are also on the sidelines.
Unless the institutional investors actively participate in the market, the expected hype will not be created among the retail investors, said Khan, also a former chief executive officer of the DSE.
The overall market PE ratio hit the highest level at 30.58 at the end of February 2010. The ratio dropped drastically in February this year, when the market was bearing the brunt of a two-month price debacle, which was unavoidable following an abnormal rise in share prices.
From March, the market started recovering and it rose to a 6,700 points level on July 7 from the 5,200-point level on February 28.
After July 7, the market again entered the red zone and since then a bearish trend is remaining in the market, with an exception of occasional rises. Until yesterday, the market lost more than 2,300 points.
sarwar@thedailystar.net