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Low PE ratio may lure investors back to stocks: analysts

Gazi Towhid Ahmed
The price-to-earnings (PE) ratio of banks, non-bank financial institutions, telecoms, textiles, and mutual funds is at low levels, which indicates that the stockmarket has become less risky and more attractive for investment.
The PE ratio of banks is 8.3, non-bank financial institutions 10.7 and telecoms 10.5.
"The PE ratio of most sectors suggests that the market has become attractive for investment,” said Fakhor Uddin Ali Ahmed, former president of Chittagong Stock Exchange.
Before making an investment decision, investors should consider the companies' PE ratio, operational growth and management, said Ahmed, who is also a vice president of South Asian Federation of Exchanges.
Conventional wisdom says the smaller the price compared to earnings, the better the deal.
Ahmed said the companies' tendency to declare dividends is another indicator to consider in making an investment decision.
Investors can make capital gains and earn dividends through long-term investment, which is important for investors in the country, he said.
The investigations being run by the Securities and Exchange Commission against unusual trading also boosted investors' confidence, Ahmed said.
Investors should consider the corporate declaration trend of a company, which have a PE ratio of below 10, over the last five years before making an investment decision, said Rakibur Rahman, former president of Dhaka Stock Exchange.
Investors should consider the fundamentals of the market instead of the index, Rahman said.
The corporate culture within listed companies should be developed to increase efficiency of management in operating the companies, he said.
Investors should base 70 percent of their investment decisions on the company’s fundamentals and 30 percent on macroeconomic news, he added. The PE ratio determines the time an investor needs to wait to get back the invested amount. It is an indicator to consider the extent of risk 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.
Market capitalisation of DSE declined 14.8 percent this month, compared to the pervious month. The benchmark general index of Dhaka Stock Exchange, DGEN, lost 21 percent, to4153.94 points in the last month.
According to the latest disclosure of non-bank financial institutions as of June, non-bank financial institutions are taking a severe beating in their bottom-line, LankaBangla Securities said in its monthly market review.
Of three non-bank institutions, Midas Finance showed a net loss in its half yearly earnings. The other two — Delta Brae Housing Finance Corporation and Investment Corporation of Bangladesh — have also had negative growth in earnings, according to the review.
"The key reason behind this fall in earnings is the capital market. Investment income from capital market has turned negative this year. Net interest margin for non-bank financial institutions has also dropped sharply due tothehighcostoffunds,” said the stockbroker.
"The economic trend indicates that this scenario will continue for the non-bank institutions for some time."