AN interesting observation about the Dhaka stockmarket is that, overall, the market has been remarkably consistent for more than eight years. There is only one thing that jumps out at when you look at the index (without trend) and that is in the beginning of 2011 when the market went into a freefall. The financial markets and the markets in Bangladesh got extraordinarily volatile for a while. It was described as a crisis period.

Following the bull-run in the capital market from 2007 to 2010, the DSE crash was really an extraordinary event. In essence, the collapse in stock prices — the one-day collapse in prices -- was down 9 percent in a single day. The one-day collapse in stock prices was a virtual impossibility. Of course, that was just a change in stock prices; it was not related to any fundamental change in the economy or any fundamental change in corporate prospects. It was just a financial event.

In the past, due to a lack of maturity of the financial markets in Bangladesh, the capital flows were invariably shortterm and speculative and were often not related to economic fundamentals but rather to whims and fads prevalent in international financial markets. One of the most pervasive problems in the Bangladeshi financial markets is that investment is for a short haul. For instance, the fact that people look at quarterly returns of mutual funds is incredibly dysfunctional. There is no way that you can expect somebody quarter in and quarter out or month in and month out to produce superior returns. There just are not pricing anomalies that are significant, that are going to resolve themselves in a matter of months or weeks and so it is an impractical game to play.

Non-resident Bangladeshis (NRBs) were slow in taking advantage of the bull-run in the capital market from 2007 to 2010 and thus missed a great opportunity to invest directly in the capital market, but there are still substantial opportunities available not just in the local capital market but also by attracting foreign institutional funds from Europe and the Middle East. International capital flows both from the NRBs and international institutions have significant potential benefits for Bangladesh economy. Countries with good macroeconomic policies and well-functioning institutions are in the best position to reap the benefits of capital flows and minimise the risks.

Traditionally, asset management companies based in Bangladesh have focused only on mutual funds and have not expanded their portfolio of products and service offerings that can create and provide better return to local retail investors. This shortfall in flexibility and lack of diverse product offerings is where there is great opportunity to assist in gaining back the confidence and appetite for local retail and institutional investors in the Bangladesh capital market.

The government could move to influence both the size and composition of capital flows from the international markets by leveraging on both the local institutions and also taking advantages of the skills and professional resources of the NRBs. Bangladesh could also focus on strengthening their banking system rather than just promoting financial markets as banks can provide the surest vehicle for promoting long term growth and industrialisation of the capital market.

The writer is a director of Rock Asset Management Ltd and can be reached at info@rockaml.com.