Reaz Islam, CEO of LR Bangladesh Asset Management
The investment case for Bangladesh is convincing, but it needs to be publicised. Too often the country gains attention for natural or man-made disasters, or else it is dismissed as a source of cheap labour for the textile and garment industries.
Yet, as long ago as 2005, Goldman Sachs named Bangladesh as one of its “Next 11” countries, which also included South Korea and Indonesia, for its promising investment and growth outlook. And the Japan Bank for International Cooperation ranked the country as the 16th most attractive investment destination in 2011.
Indeed, Bangladesh has enjoyed a decade of sustained improvement in its macroeconomic indicators, as Fazle Kabir, Bangladesh’s finance secretary, told about 300 delegates at the inaugural AsianInvestor and FinanceAsia Bangladesh investment summit in Singapore on December 4.
In particular, per capita income has more than doubled and poverty levels have declined as annual economic growth has risen, especially during the past five years, and a youthful and flexible population sustains the vigour of all sectors of the economy.
To maintain this promising trajectory, the country now needs investment.
Kabir highlighted a wide range of sectors in which Bangladesh is keen to attract long-term investment and where there are prospects for strong returns. These include familiar areas such as infrastructure — communication, transport, power and oil and gas — textiles, leather goods, pharmaceuticals and shipbuilding.
In addition, the country has enjoyed a boom in telecommunication equipment manufacturing and infocom services, and has attracted Japan’s Honda to start joint production of automobiles. It also wants to develop its tourism industry.
Foreign direct investments, including private equity, must be registered with the board of investment and certain sectors, such as armaments, currency note printing and nuclear energy are reserved for the government, according to Abrar Anwar, co-head of wholesale banking at Standard Chartered in Bangladesh.
Investors can exit by selling to other non-residents and receive foreign exchange, but repatriation of sale proceeds is subject to tax and the agreement of the central bank — although repatriation of profits and dividends do not need prior approval.
There is legal protection against nationalisation, expropriation and non-discriminatory treatment, and incentives offered to foreign companies operating in Bangladesh’s eight export-processing zones.
Portfolio investment is another option; it is also, perhaps, an easier one.
“Access to the markets is straightforward,” said Christian Forthuber, managing director at SwissPro, in a panel discussion. His Dhaka-based investment advisory firm set up a pioneering frontier market fund that focuses mainly on Bangladesh. He emphasised the importance of good corporate governance and building relationships, and his fund aims to earn returns from long-term compound growth.
Forthuber insisted there is sufficient free-float in the markets and plenty of liquidity to make investment worthwhile for overseas investors.
Anwar, in a separate presentation, explained the process.
Foreign institutional investors (FIIs) can simply open a non-resident investor’s taka account with a bank, and then invest directly in listed securities and pre-IPOs. Neither prior approval from the authorities nor additional regulatory registration are needed and, except for a 10% limit of bank shares, there are no size limits on holdings.
There are currently 513 securities listed on the Dhaka and Chittagong stock exchanges with a capitalisation of $29 billion, including 240 equities and 41 mutual funds; the rest are treasury or corporate bonds. Trading is conducted electronically on the exchanges and sale proceeds are freely remittable abroad.
Alternatively, investors can gain exposure to the country through a Ucits-compliant exchange-traded fund launched by Deutsche Bank in September 2011. The US dollar denominated db X-trackers MSCI Bangladesh IM Index ETF tracks an index with 64 constituents, with a preponderance of financial stocks.
State Street Global Advisors manages the ETF, and collateral rules are strict and exposures are transparent, pointed out Marco Montanari, head of db X-trackers ETFs at Deutsche Bank.
According to Reaz Islam, chief executive of LR Bangladesh Asset Management, the benchmark DGEN index has returned 12.2% since 1990, compared with a 10.1% return on Nasdaq, 13.3% on India’s Sensex and 10.4% on Vietnam’s VN-Index. Some sectors, notably financial institutions, fuel and power, ceramics and engineering have performed particularly well during the past six years, posting annual growth of between 44% and 49%.
The market also has low correlation with the S&P 500 and the Euro Stoxx 50. The DGEN now trades on a similar price-earnings multiple as Nasdaq and Sensex, but its market capitalisation of 21% of GDP is much lower than both — 104% and 55%, respectively.
Clearly, there is room for the market to grow in size and variety.