cottonThe last decade has seen Bangladesh develop into a textile exporting powerhouse, despite a troubled history an increasingly strong looking economy has given the country a potentially brighter future. Its proximity to gigantic India often overshadows the fact that the country has a 156 million sized population, making it the 8th most populous nation in the world and one of its youngest.

A new picture is emerging of export driven steady economic growth and an increasingly attractive foreign investment climate, the nation still faces political uncertainty, the long term challenges of climate change and widespread poverty, but now with more optimism that its great resilience can help overcome these issues. The time has come to take Bangladesh seriously as an investment destination.

The Inside Track

I was fortunate enough discuss Bangladesh with Mustafa Jain and Kazi Monirul Islam who work at Bangladesh’s leading securities firm IDLC, they gave me the inside track on the future of the economy and how outsiders can take a bet on Bangladesh’s stock markets and which sectors look the most promising. Below I take a look at:

  • The mechanics of foreigners investing in the Dhaka exchange and what sectors to target.
  • Economic & political trends and whether the country can fulfil its promise to become a regional trade hub.
  • The China factor – how will newly forged ties with Beijing help or possibly hinder the economy

Dhaka Direct

While you can easily invest in frontier market focused funds that will give you exposure to Bangladesh, if you really want to take a stake in the country’s future you can invest directly into shares listed on the Dhaka exchange, of course this is risky given the market has suffered a number of collapses but the potential upside is huge:

The first thing you need to do is open an account at a local bank, Standard Chartered, HSBC and Citi all provide a service, then open a securities trading account at a brokerage firm such as IDLC, after that you can start placing orders with your new broker.

Your local broker can give you on the ground up to date information on the market and listed companies and of course you can also investigate and research companies independently. The Dhaka market is illiquid and inefficient compared to a developed market, but of course that creates far more scope for spotting undervalued companies. There are five categories of share on the exchange as you can see below:

Share Categories

Category Description
A Maintains regular AGM, declares at least 10% or more dividend in last fiscal

year

B Maintains regular AGM, declares at less than 10% dividend in last fiscal year
G Greenfield companies
N All newly listed companies except Greenfield companies
Z Failed to hold AGM & did not declare any dividend in last fiscal year

And few other things to note about doing business in Bangladesh:

  • Dividend tax 20%, capital gain tax 10%.
  • 100% of repatriation of capital /dividend and capital gain.
  • Over 10% shareholding in a firm by a foreigner will be reported to the Securities Regulator.

Clothes, Phones and FMCGs

Naturally you may wish to invest in specific companies you have researched which you believe are undervalued or represent good long term value, but it is also worth thinking about which sectors offer the best long term potential in Bangladesh:

The great strength of the Bangladeshi economy is its exporting prowess – in particular its garment industry which churns out cheap clothing for high street stores like H&M in Europe and makes up over 80% of all the nation’s exports. The country remains a low cost destination for garment makers as it has plenty of firms and workers with the extensive experience in producing ready to wear clothing. While other countries in Asia and Africa are likely to try and muscle in on this market, Bangladesh has a strong toehold which it will not let go of easily.

There is also a great deal of foreign interest in the potential for the consumer goods market or in the current parlance; Fast Moving Consumer Goods (FMCGs), items like soap, processed food and beauty products. In common with most frontier markets the presence of a young population allied with economic growth means a fast growing middle and urban class, which usually equates into a consumer goods boom.

Telecommunications are also good bet, like other frontier markets mobile phone usage has shot up but the take up of smart phones along with the use of internet based services, films, games etc is still in its infancy so you can safely bet this is a growth industry.

What’s the Catch?

That’s the positive news, but we have to remember like any frontier market there are downsides, the stock market remains immature, the market cap to GDP ratio is only around 20% (Sri Lanka’s is around 30% and Thailand nearly 100%) and it remains illiquid and prone to overheating. The last few years saw a big bubble burst, the market rose by 36.6% increase in 2009, then by 82.8% in 2010. Of course this did not last, two years in a row it declined by 36.6% in 2011 and 19.7% in 2012. However the last two years have seen a recovery with a 3.3% return in 2013 and 14.0% in 2014. The market looks stable and steady enjoying moderate growth with companies trading at a c. 15.0x P/E multiple. Things look good now but the lesson is clear to any investor – the market can turn very quickly.

The Political Landscape

One area Bangladesh is not looking in such great shape is the nation’s political scene – with the opposition party demanding an early election, protests and blockades are a regular occurrence and while this uncertainty does not help business confidence, stable politics are a rarity in frontier markets and most of it perfectly normal “noise” with no impact on business operations. The political scene is dominated by the feud and rivalry between Sheikh Hasina the current Prime minister who was re-elected with a whopping but illusory 82.8% of the vote in 2010 after the opposition boycotted the 2014 election. Her great rival and ex-PM is Khaleda Zia who recently organised a general strike in an attempt to force a general election, she and others were subsequently charged with arson on a bus.

The Economic Outlook

On a more positive note internal political chaos has not stopped the country enjoying steady growth over the last few years. Islam Kazi of IDLC is confident the country is ready to move into higher growth and while political uncertainty is holding it back, the country’s well-established textile industry will continue to benefit from firms fleeing rising costs in China, it will also gain from factors like predicted higher growth in neighbouring India and consumer demand in the EU.

The country also has a young demographic profile, this can be a problem if there is widespread unemployment, but youth is also a great asset that can power growth through a large workforce and the consumer demand they stimulate, the downside is that an underemployed, angry youth is also the recipe for riots and revolution. Islam Kazi also noted that the government had followed other emerging economies in ensuring that they had built up strong foreign exchange reserves to act as a buffer against external shocks. In the short term Bangladesh has also benefited from lower oil and commodity prices, but of course these can change quickly and without warning.

Another area the government have been instrumental has been in developing the nation’s infrastructure – electricity generation has recently been doubled and there are more (Japanese backed) power stations in the pipeline. Other infrastructure projects like the Padma Bridge and a four-lane highway connecting the country’s two major cities Dhaka and Chittagong can also help to spur further economic growth.

Bangladesh also relies heavily on remittances from overseas workers primarily in the Middle East and Saudi Arabia has recently opened the door to more Bangladeshis working in the country.

The country faces political chaos and uncertainty, but we can be optimistic about its economic future, there are also external forces which could change the nation’s direction, below I look at the China factor…….

The China Factor

Last year China and Bangladesh signed an MOU on the creation of a Chinese investment zone in Chittagong – Bangladesh’s main deep sea port, this promises to help the country realise its potential to be a regional trade hub and ensure the swift export of its vital garment trade, it also underlines China’s growing stake in the South Asian nation.

The China – Bangladesh axis has taken off in a big way in recent years, trade between the two countries has grown rapidly so it is now worth around US$ 10 billion, but it is heavily in China’s favour with Bangladesh only managing US$ 100 million worth of exports to China and this was primarily fish and leather goods, while it imports machinery, chemicals and electrical equipment from China. In order to redress the balance Dhaka is seeking duty free access for 17 additional products – primarily garment related so it can effectively target the vast and lucrative but often difficult to reach Chinese market.

Other countries such as Japan and India also view the country as an important partner – Japan is helping to build the coal fired Matabari Power Plant and has promised to develop export processing zones for Japanese exporters.

The great geo-strategic question is whether Bangladesh will move into the Chinese or Indian camp, or most likely remain as neutral as possible and ensure a balance between the great powers. Bangladesh has traditionally maintained this non-aligned stance, which makes sense given its geographic position almost surrounded by India, a country it therefore has to remain friendly with, but will want to avoid overdependence on.

Another initiative to recently gain ground is the Bangladesh, China, India and Myanmar (BCIM) Economic corridor. In the last year India has taken more serious interest in the project, which is part of China’s wider Silk Road initiative, at the heart of this is improved communications and the upgrading of the K2K route from Kunming in southern China to Kolkata via Mandalay and Dhaka. Despite a large land border movement between India and China is difficult, the north-eastern region of India is strategically sensitive as it remains geographically remote from the rest of India and there are major unresolved border claims between India and China. The route would help connect China to the other three countries by land and drive economic development around the corridor, it also reduces reliance on sea routes, which remain the traditional conduit of trade between the nations.