The financial market is very cyclical in nature. This means when money is cheap and the interest rate is low, liquidity flow usually remains robust.
Investors should focus on the stocks with good fundamentals instead of making bets on speculative securities and worrying too much about global scenario and their impacts on the market, said Shekh Mohammad Rashedul Hasan, managing director of UCB Asset Management.
“The financial market is very cyclical in nature. This means when money is cheap and the interest rate is low, liquidity flow usually remains robust.”
This was seen during the pandemic-hit 2020 and 2021 when people were sitting on idle cash but had little scope to make investments. As a result, there was a healthy liquidity flow in the stock market.
“There was a time when liquidity was in our favour. Now, the liquidity situation is not as favourable as it was in the last two years. It will take time.”
The liquidity situation was better in 2017 and it faced squeezing in 2018 and 2019 before improving in the following two years.
“This is cyclical and there is nothing to be worried about,” said Hasan, who received his bachelor degree from the Bangladesh University of Engineering and Technology and an MBA from the Institute of Business Administration at the University of Dhaka.
He says the liquidity in the market has dried up because of higher import costs, increased shipping charges, and higher inflation. As the economy is firing on all cylinders, there has been no looking back for any economic activities.
He cites two factors that take the market forward: liquidity and good corporate earnings growth.
“If companies make good businesses, then liquidity will automatically flow to the market.”
It was anticipated that the liquidity flow would slow when the economy reopened following the receding of the pandemic and if interest rates creep up gradually.
“This is very natural in the cyclical financial market,” said Hasan.
According to the investment manager, the price of raw materials used by many listed companies is directly linked with the global oil price. So, when the price of oil is low, their profit margin is high and vice versa.
“But this is the nature of businesses – one year you make a profit but the following year you will make a lower profit and even incur losses. But as the economy has reopened, companies will not find it difficult to clock higher earnings.”
But people are worried whether the earnings will get squeezed and companies’ overheads will go up because of higher inflation. Companies may have to raise wages and salaries to help employees tackle the impact of inflation. This may hit their profitability.
Investors are also concerned about the higher call money rate.
“But the interesting thing is businesses fared well at the height of the pandemic when people had thought that businesses would suffer. I am not saying that businesses can’t have bad days. This may happen. But many investors worry too much.”
He says there are many good companies that have not seen any significant rallies in the last one year.
“These companies are doing quite well. But many investors have become involved in speculative investment. But it is the speculation-driven stocks that suffered more when liquidity came under pressure compared to the companies whose fundamentals are sound. The companies with good fundamentals will post good performance going forward.”
If there are no supply chain disruptions and natural shocks such as cyclones and floods, the economy will be able to keep growing at a healthy clip.
“So, I am not worried,” said Hasan.