2022’s stock market has two major headwinds: Professor Mahmood Osman Imam

The new year's stock market outlook is not very clear, and it is going to face two headwinds — omicron, and the role of the central bank in 2022, said Dr Mahmood Osman Imam, Professor of Finance at the University of Dhaka.

In a recent interview with The Business Standard, he said the corporate earnings will be impacted if the omicron variant of the coronavirus bites deep.

If Bangladesh faces a dire situation because of an outbreak of the new variant, the country's economy would be severely impacted.

On the other hand, even if the country manages to withstand any omicron wave, its foreign trade would be disrupted if its major sources or export countries remain locked down, the professor said.

"Textile and apparel, and leather and footwear sectors are likely to suffer the most if the omicron wave widens. But of course, it's uncertain," Dr Imam said. 

The other likely factor to influence the stock market in the new year is the role of the central bank, especially its stance regarding the capital market, as it is a strong enough factor to shape investors' confidence.

The capital market exposure calculation method for banks should be cost-based, as it is for other sectors, said the financial market expert.

Banks were once allowed to invest up to 10% of their deposits, which was a big portion.

But following the 2010-11 stock market crash, the Bank Companies Act was amended and the limit was set at 25% of the banks' solo equity and 50% of the equities of their subsidiaries.

This amendment reduced the banks' stock market investment limit significantly, which Dr Osman Imam does not oppose.

"But, the main problem lies within the exposure calculation method," he said.

When the stock prices went up in the second half of 2021, the same investment of banks began to turn over investments as the exposure is calculated based on the market price of securities and banks were under pressure to sell off part of their holdings.

"As far as depositors' risk is concerned, it is the purchasing price of stocks, not the market value," he added.

Banking stocks, a large part of the bourses, do not look too lucrative right now as the banking sector might need to pay out fewer dividends amid provision or capital shortfall, despite the deferral facility against irregular loans, he opined.

"If there is no omicron wave, the banking sector might turn around in the second half," he expected.

However, investors' responses to emerging situations and events always remain supreme in the market.