Lessons learned from Dhaka chaos

via CAAI

Friday, 14 January 2011 15:01 Steve Finch

THE chaos in Bangladesh and more restrained trading that defined the opening bell at the first bourse in Laos this week served as timely reminders of how to promote stability in less developed financial markets as Cambodia prepares to launch its first stock exchange.

As the Dhaka exchange lost a combined 17 percent on Sunday and Monday before rebounding strongly, Bangladesh serves as a classic example of what happens when private investors fail to grasp the fundamentals of stock trading.

Having outperformed just about every other stock market in the world last year with a rise of more than 80 percent, Bangladesh’s bourse has been fueled largely by investors who have followed the herd. But few of these investors bother to base what essentially amounts to gambling on the financial fundamentals of the companies they are backing.

The result is an exchange which has remained highly volatile as the blind have continued to lead the blind following a failed effort to educate individual investors in how stock markets work.

In Cambodia, which has only in recent years become accustomed to banking, educating investors and placing necessary limits on the rise and fall of stocks – as initiated in Vietnam – are among the tools available to avoid similar volatility. By offering just two IPOs from the outset Laos on Tuesday made a low-key launch to its first stock exchange, which limited investors to just 25 percent of one of the listed companies, Electricite du Laos Generation Company.

The decision to list shares in the kip (and not the US dollar) means Laos has a great deal more to protect than just the stability of its new exchange, the companies involved and the interests of investors. The local currency, which has risen steadily against the greenback in recent years unlike the Cambodian riel, will as a result be further tested as local and foreign investors are forced to trade in the kip.

Cambodia is not ready to do the same with its currency, which has struggled in recent years, but efforts to build the Laos exchange steadily from a very small base while limiting investor access serve as useful lessons here.

Cambodia should not fall into the Bangladeshi trap of initiating emergency measures after an event, as happened this week when curbs on bank loans for stock investors were lifted to raise liquidity.

Conservatism from the outset, as shown by the Laotian exchange, may not set the financial world alight – at least not at the outset – but the prospects for longer term growth and stability will surely be all the greater for it. Cambodia should take note.