Anatomy of DSE-Blue Chip Index: DS30
The term ‘blue chip’ has its roots in the game of poker, where blue chips represent the highest value. In the business world, ‘blue chip’ refers to reputable companies that have consistently delivered earnings and are leaders in their respective industries. A blue chip index is a collection of wealthy, renowned, and industry-leading companies. The Dow Jones Industrial Average (DJIA), which comprises 30 large-cap stocks of leading companies from various industries in the United States, is a well-known blue chip index. Other examples include the S&P 500 and the NASDAQ-100. In Bangladesh, there are two blue chip indices: DS30 and CSE 30. These indices are used to track the performance of the top companies listed in the respective exchanges and provide investors with a benchmark for their investments. Many investors use them as a basis for passive investment strategies.
Example of Blue Chip Index
The term “blue chip” was first used by Oliver Gingold, a Dow Jones journalist, in the 1920s to describe high-quality stocks. Some of the most well-known blue-chip indices include:
- Dow Jones Industrial Average (DJIA) – Established in 1896 by Charles Dow, it tracks 30 large American companies and is one of the oldest and most widely followed indices in the world.
- S&P 500 – Created in 1957, it includes 500 of the largest publicly traded companies in the United States, representing a broad range of industries.
- FTSE 100 – Launched in 1984, it consists of the 100 largest companies listed on the London Stock Exchange, representing about 80% of the market capitalization in the UK.
- DAX – Established in 1988, it tracks the 30 largest and most liquid companies listed on the Frankfurt Stock Exchange in Germany.
DSE-Blue Chip Index: DS30
DS30 includes the 30 most financially stable and active companies from different industries. The index was launched in early 2013 and is calculated using the free-float market capitalization method. It is reviewed twice a year to ensure it reflects the update scenario. The DS30 is important for investors, both local and foreign, to understand how the stock market is doing in Bangladesh. Followings are the criteria, as per ‘DSE Bangladesh Index Methodology’ designed and developed by S&P Dow Jones Indices, to include in DS30.
Representation: DS30 constructed with 30 leading companies which can be said as investable Index of the Exchange. “DS30” reflects around 51% of the total equity market capitalization.
Market capitalization: The stocks must have a minimum market capitalization of BDT 500 million as of the rebalancing reference date. A stock’s weight in an index is determined by its “float-adjusted market capitalization”.
Liquidity: Stocks must have minimum three-month average daily value traded (ADVT) of BDT 5.0 million as of the rebalancing reference date. Liquidity criteria can be reduced to BDT 3.0 million in criteria circumstance to ensure there are enough constituents in the index. At each semi-annual rebalancing, if a current index constituent falls below BDT 5.0 million but is no less than BDT 3.0 million then the stock remains in the index provided it also meets the other eligibility criteria.
Financial Viability: Stocks must be profitable as measured by positive net income over the latest 12-month period, as of the rebalancing reference date. The figure is calculated by adding the latest four quarter of net income reported for the company.
Sector Classification: All listed DSE stocks are classified according to the DSE Industry Classification system. The number of constituents in Banks, Financial Institutions, Insurance sector, Real Estate Sub-sector of Service & Real Estate sector, Pharmaceuticals and Fuel & Power is capped at 5 each and 20 combined for the DSE Bangladesh 30 Index.
Base Date: The base dates of the DSE 30 Index (DS30) are January 17, 2008.
Base Value: The base value is 1000 for DS30 Index.
Non-inclusion: Mutual funds, Debentures and Bonds are not included in DS30.
Current Situation of DS30 and It’s Future Prospect
Last year in July, due to the global economic slowdown and the Russia-Ukraine war, the Dhaka Stock Exchange in Bangladesh re-imposed the floor price to prevent a further decline in the price of listed securities. This was done after the key index dropped below 6000 points and investors’ participation declined. As a result, many of the DS30 companies are now trading at the floor price.
In January of this year, Morgan Stanley Capital International (MSCI), a global investment research firm, conducted its quarterly review and decided not to make any changes to how it measures the performance of Bangladeshi stocks in its frontier markets index. This decision was made due to the “deterioration of liquidity” in the equity market, indicating a lack of investor participation and activity in the market.
Morgan Stanley’s frontier markets index includes seven companies from Bangladesh, namely Square Pharmaceuticals, Beximco, British American Tobacco Bangladesh, Grameenphone, Renata, Robi Axiata, and United Power Generation and Distribution Company. However, recent data indicates that foreign investment in some of these companies has declined. For instance, the foreign stake in Square Pharma decreased from 13.91% in June 2022 to 13.31% in March 2023. Similarly, foreign investors held 3.11% stake in Grameenphone in June 2022, which decreased to 1.99% in March 2023. This suggests a deteriorating foreign investors’ confidence in the Bangladeshi equity market.
As per the Dhaka Stock Exchange (DSE), foreign investors invested Tk 8,665 crore in listed stocks in Bangladesh between 2010 and 2017. However, in the next five years from 2018 to 2022, they withdrew almost the entire amount, amounting to Tk 8,100 crore. The exodus was driven by the Bangladesh Bank’s regimented foreign exchange rates, which caused foreign investors to assume currency risk. This led to foreign investors selling off DSE stocks starting from 2018. Since May 2022, the taka has been depreciated by more than 25%.
Despite floor price restrictions on almost all companies, foreign investors withdrew Tk 871 crore from the Dhaka Stock Exchange in August and September 2022. The outflow comprised Tk 582.21 crore in August and Tk 289.4 crore in September. Before the significant outflow of foreign funds in the last year, the highest net foreign sales were recorded at Tk 676.58 crore in 2010. The trend of net foreign investment in the DSE has been negative for the past four consecutive years due to various factors such as volatility in the country’s financial market, interest rate ceiling on bank loans, floor price restrictions, and better investment opportunities in developed markets.
Here are some of the pros and cons of investing in the Blue-Chip Index in Bangladesh. One of the main advantages of investing in the Blue-Chip Index is that it provides exposure to the largest and most established companies in the market. These companies are often well-known names and have a history of success. By investing in these companies, investors can potentially benefit from their stability and strong market position. Another advantage of the Blue Chip Index is that it offers diversification across multiple sectors and industries. This can help investors spread their risk and reduce their exposure to any one sector or industry. In addition, diversification can help investors capture potential gains from different sectors and industries that may be performing well at different times. The Blue Chip Index is generally considered less volatile than smaller, less established companies. This is because Blue Chip companies tend to have more stable revenue streams, established customer bases, and stronger balance sheets. Hence, by investing in the Blue Chip Index, investors can potentially benefit from this lower volatility and reduce the risk of significant losses.
The Blue Chip Index can also be a good benchmark for the overall performance of the market. As the largest and most established companies in the market, their performance can be an indicator of the health and direction of the broader economy. Investors can use the Blue Chip Index as a reference point to compare the performance of their own investments against the broader market.
Despite its advantages, there are also some drawbacks to invest in the Blue Chip Index. One of the main limitations is that it provides limited exposure to smaller, potentially high-growth companies. These companies may not meet the criteria for inclusion in the index, and investors may miss out on the potential for high returns.
Another limitation of the Blue Chip Index is that it may not capture the full breadth of the market, as some sectors or industries may be underrepresented. For example, if the index is dominated by financial companies, other sectors such as healthcare or technology may not be adequately represented. This can lead to an incomplete picture of the overall market performance.
The Blue Chip Index can also be heavily influenced by a few large companies. The performance of these companies can have a disproportionate impact on the index’s overall performance, which may not accurately reflect the performance of the broader market. Additionally, the Blue Chip Index may not necessarily reflect the performance of the broader economy. While the largest and most established companies in the market can be indicative of economic health, they may not necessarily reflect the performance of small and medium businesses or other economic indicators such as inflation or unemployment.
In conclusion, the Blue Chip Index in Bangladesh can provide investors with exposure to established companies, diversification, lower volatility, and a benchmark for the overall market performance. However, investors should also be aware of its limitations, including limited exposure to high-growth companies, underrepresentation of some sectors, influence of large companies, and limited reflection of the broader economy. It is important for investors to carefully consider their investment goals and risk tolerance before investing in the Blue-Chip Index or any other investment. However, according to the HSBC report, Bangladesh stock holds ‘hidden gems’ for investors.