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Bangladesh Macro and Strategy Report (Jan 15, 2014)

Bangladesh Macro and Strategy Report (Jan 15, 2014)

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Published by Asif Khan
An analysis of the macroeconomic situation of Bangladesh in 2013 and also an outlook for 2014. For public distribution purposes some pages have been removed from the original documents.

Contact me at kh.asif@gmail.com for feedback
An analysis of the macroeconomic situation of Bangladesh in 2013 and also an outlook for 2014. For public distribution purposes some pages have been removed from the original documents.

Contact me at kh.asif@gmail.com for feedback

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Published by: Asif Khan on Feb 06, 2014
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04/17/2014

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Analyst:
Asif Khan, CFA
asif@bracepl.com
 
We see 2014 to be very important in deciding the future of the country and politics could play a major role in that. Economic activity in terms of investment, credit growth, import etc is likely to be subdued at least till the first half of the year. On the bright side, the strong foreign exchange reserve minimizes the risk of a currency crisis, while relatively benign inflation will allow space for monetary stimulus. Furthermore recent developments in the political arena indicate that the worst case scenario is a low possibility as the opposition has called off strikes till further notice. Despite a relatively mixed outlook in terms of economy, we do expect total corporate earnings of the listed universe to show growth after three consecutive down years (primarily due to financial sector earnings drop). However, the 12M trailing P/E multiple of 18.2x indicates that some of this growth has already been discounted in the market.  A quicker resolution to the political stalemate will be an upside risk in our view. Things to observe carefully would be the 1. Political developments 2. Health of the banking sector and also the 3. RMG sector which came under increased scrutiny in 2013.
Introduction
2014 was supposed to be the year of opportunity where the stock market would finally get out of the 3 year long bearish run which saw the market fall by around 50-60%. It was supposed to start with election related festivities which usually bring a lot of hope and excitement. Unfortunately for us, the lack of progress on negotiations between the major parties has put in a dampener right at the beginning of the year. The 10
th
 general election faced a credibility problem as the main opposition BNP decided to boycott it. Now everybody is looking towards how the political situation evolves as it is the deciding factor for the long term growth trajectory of the country.  As politics is the centerpiece of this report we will first give an update on the political scenarios and their implications. Then we will take a quick look at the 2013 macroeconomic performance and provide an outlook for 2014 along with the implications for the market.
 A positive shift in politics observed
The recent developments in the political arena have some clear positives and we feel that the worst case scenario has been averted. Businesses and the economy will see a breathing space as the opposition has changed their strategy of continuous strikes and blockades. Meanwhile the ruling party also has strong incentives to win back the people through good governance before another election.
Earnings recovery anticipated after three down years
Macroeconomic and Strategy Report January 15, 2014
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Turnover (BDTmn) (RHS)DSEX (LHS)
Index DataCurrent Index
DSEX
4,49452 week High4,49452 week Low3,4392013 Return*5.20%Market Cap (BDT mn)2,754,034Market Cap (USD mn)34,861 ADTV in 2013 (USD)51
Market and Turnover
 
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Macro and Strategy Report
Opposition has shifted away from aggressive stance
We feel that the opposition has realized that the continuous strikes will not lead to any benefit for them and this leg has been won by the ruling party. The opposition has already stopped strikes and blockades for the time being. They have announced programs for 30th January with one solitary strike on 29th in stark contrast to the last few weeks. On January 15th the opposition Chairperson Khaleda Zia in a speech also urged the government to hold another elections as soon as possible. Furthermore we have also seen that the effectiveness of the continuous strikes has been declining over time. People in the metropolitan cities were ignoring the strikes and companies were adopting strategies to work despite the problems. The political strength and organization structure of the opposition BNP has also been weakened considerably. As such, even if they wanted to it would be very difficult for them organize massive unrest across the country. They will continue to try to get diplomatic backing of the international community namely USA and the EU which have asked the government to hold another election.
Ruling party has incentive for winning back popularity
Recent opinion polls suggested that opposition alliance had higher popularity than the ruling party. So, ruling party has a clear incentive to take time and work as hard as possible and win the people back. Some signs are quite clear like the selection of the new ministers. Some of the more controversial names have been replaced by new names. We are thus cautiously optimistic on the governments activities. Furthermore while many nations have asked the government to hold another election there are no binding time lines since they are in conformation with the constitution. The probability of international sanctions being imposed is almost zero and the US government has already announced that they will work with the current government (while insisting
Political Scenario Analysis
ScenarioDescriptionEconomic implicationCompany ImplicationProbabilityBullBoth parties will negotiate and come to a settlement. Peaceful elections will happen with smooth transition of power. Rapid recovery in economic activity and investment as well.Banks could lead the rapid recovery but non-banks will also benefit.ModerateBaseOpposition will stop blockades and strikes and instead try other avenues to push the government for another election. Government will meanwhile try to focus on good governance to try to increase their popularity.Business activities will resume normalcy but real sector investors might go for wait and see policy.Banks would see earnings revive from lower base but loan growth might remain low. Non-banks will do business as usual. HighBear Government will hold on to power while opposition will continue to hold strikes and blockadesBroader macroeconomy will suffer with financials taking the worst hit. Almost all companies impacted negatively. Gas utility will be relatively defensive.Low
 
3
Macro and Strategy Report
that a new election is also required). We feel that government will try to linger its tenure but will still try to deliver results so that, if anytime they need to hold elections, they have a fair chance of winning.
Chances of election looks slim in 2014
There are significant bottlenecks that have to be addressed before election
can take place. We really can’t put in a timeline but we are of the opinion
that the probability is low in 2014 because 1. The two parties are yet to agree on the model of poll-time government. Neither party have moved from their initial stance. 2.
Even if poll time government’s model is agreed the opposition will
surely demand a revamp of the Election Commission which it alleges was completely biased. Restructuring of election commission will be a leading indicator.
Macro outlook based on base case
 As we feel that the base case has the highest probability for 2014 we have formulated our forward looking views based on that. The next segment contains our analysis of 2013 and views about 2014.

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