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Bangladesh’s stock market a hidden gem, says HSBC

Thanks to the potential of the country’s listed companies, HSBC has termed Bangladesh’s stock market as a “hidden gem” for fund managers.

Although Bangladesh has higher earnings growth, the sell-side remains limited, the British multinational investment bank said in a report on the Asia frontier styled, “Bangladesh at 50: ready to close the gap with Vietnam”.

With a market cap-to-GDP ratio of just 14 per cent, the country deserves more attention than it gets, it added.

Although the market is small, illiquid and not that easy to access, so was Vietnam’s five years ago.

Besides, the two markets were similar in size until 2015, but Vietnam’s has grown four times in size since then.

“We think Bangladesh is ready to close the gap as the country is less correlated with the global macro and equity themes than Vietnam and also receives far less attention from analysts, creating opportunities for fund managers looking for diversification and hidden gems,” the bank said.

Large Vietnamese companies are covered by the sell-side but this is not the case in Bangladesh, which is a fertile ground for fund managers.

Bangladesh’s stock market is where Vietnam’s was five years ago and is well placed to start closing the gap.

“Bangladesh is on a similar growth trajectory to Vietnam, the frontier market we have long favoured which now has higher trading turnover than Singapore,” HSBC said.

Moreover, Bangladesh has a larger economy and population that are growing at a faster pace despite power shortages, poor infrastructure, a banking sector struggling with soured loans, and political issues.

The country also has a sound macro position and robust external balance sheet while its external debt is low and foreign exchange reserve coverage is high.

Regarding the local banking sector, HSBC said the level of non-performing loans (NPLs) is above 8 per cent, centred around agriculture, large industries, and garment companies.

The main issue is a substandard credit information system while recovering loans is complex and time consuming.

“The weak asset quality of Bangladeshi banks, especially in the public sector, remains a concern,” it added.

However, Vietnam’s banks used to have a similar problem with NPLs but thanks to strong growth in profitability, their balance sheets are now stronger.

HSBC went on to say that Bangladesh’s pharma market has the potential to cross $6 billion by 2025 as the government is easing its drug approval policies.

The country sources most of its raw materials from China and India but that is set to change as the government is setting up an industrial park to make active pharmaceutical ingredients.

In addition, leading companies have secured US FDA approval, giving them access to high-margin western healthcare markets, it added.

Bangladesh is one of Asia’s most exciting long-term demographic stories, the report said.

“With a population of around 165 million –there are as many Bangladeshis as there are Thais and Vietnamese combined –we think the country is on the cusp of an industrial revolution as incomes rise and technology plays an ever-increasing role in the economy.”

Urbanisation, smaller households and more women at work are powerful consumption drivers that support high levels of growth, it said.

Bangladesh has posted consistently high economic growth for a decade.

“More importantly, the volatility of growth has been below the regional average. For a country facing such big challenges –infrastructure, power supply, poverty, and floods –Bangladesh’s economy has proved to be very resilient,” HSBC said.

Bangladesh has a strong fiscal position and a robust external balance sheet. It is also one of the least-exposed economies in the region to portfolio flows, sheltering its exchange rate from volatility.

Vietnam has made it easier to set up a business and simplified land registration and loan processes. This makes the market more attractive for FDI.

“Bangladesh still lags Vietnam but is making efforts to improve the ease of doing business,” the report said.

Based on the Worldwide Governance Indicators, Bangladesh scores higher in accountability, but Vietnam scores better on all other indicators. Both countries have made progress in terms of corruption control, it said.