Bangladesh has a natural hedge to both global economic stress and fluctuations in commodity prices. Commodity market trend could be used to understand the Bangladeshi market cycles. RMG and remittance give stability to Bangladesh Forex Reserve and induce savings from commodity import. That savings flow directly into Net Foreign Assets (one of two M2 component). As a result of low commodity prices, the risk of inflation dramatically reduces. This helps the Central Bank to turn up the Net Domestic Asset growth. Eventually when M2 increases, yields fall and, the excess liquidity gets channeled towards riskier asset classes.
Three equity market rallies in 2010, 2017, and 2020-21 were preceded by treasury yield dips, however with an obvious 6-12 month lag between yield dip & equity rally. Usually, when there is a fall in the commodity prices the import cost significantly reduces, which causes FX to build up over time. Moreover, it also enables the central bank to increase the growth of net domestic assets because of lower inflationary pressure. This in turn leads to boost private sector credit growth resulting from a sizable increase in net asset and M2 (broad money) growth. However, as there is a significant growth in “excess cash” which gets deployed to the treasury, the treasury yields end up falling. The funds are channeled towards riskier asset classes once the yields go down.
It is important to keep an eye out for the ongoing commodity rally. Given (i) commodity prices appear to be recovering, and (ii) private sector borrowing is expected to recover by 2H 2021, a tightening of yields could be expected in the latter half of the year. The authors suggest using 364- day bill and 5-year bond yields as the guiding points to play the equity market rally.
This report was first published on January 21st, 2021.
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