Blue-chip index brings up the rear

The blue-chip index of the Dhaka Stock Exchange is lagging behind the broader index as most investors prefer to bet on low-priced securities and are driven by rumours instead of making investment decisions by examining the fundamentals of companies.

A blue-chip refers to an established, stable, and well-recognised corporation. Blue-chip stocks are seen as relatively safer investments, with a proven track record of success and stable growth.

But on the DSE, the index for blue-chip stocks, DS-30, rose 9.38 per cent between January 1 and July 12, whereas the DSEX, the benchmark index, surged around 12 per cent.

The blue-chip index includes 30 companies such as Grameenphone, Square Pharmaceuticals, British American Tobacco Company, BSRM, Brac Bank, and Eastern Bank Ltd.

The companies are selected based on several criteria, such as paid-up capital, contribution to market capitalisation, liquidity, and profitability. Almost all the stocks are top performers. The DSEX contains 307 companies, which also include low-performing stocks.

The DS-30 is not representing all the blue-chip stocks at the moment, however, some well-performing companies have been left out as only 30 stocks are allowed in the group, said an asset manager.

But despite making a lower profit and lower dividend payout, some companies have been placed in the list because of the high paid-up capital and liquidity, he said.

Nonetheless, the DS-30 represents the blue-chip stocks and it is expected that the index will lead the market.

"But we see the DS-30 is falling behind the benchmark index," the asset manager said.

Investors' behaviour has caused the DS-30 to post lacklustre performance since most of the traders make an investment for a short period and are driven by rumours. So, they barely go after blue-chip stocks, according to analysts.

Only institutions invest for a longer period and pour money into the blue-chips. However, their participation is thinner than general investors.

"People want to invest in low-priced stocks in the expectation that the shares will jump within a short period," said Prof Mohammad Musa, a stock analyst and a member of the board of trustees of United International University.

"Many investors want a fast movement of a stock, so they are keen to put their money into rumour-based and manipulation-centric companies."

In comparison, the base value of blue-chip stocks is comparatively higher and are relatively difficult to manipulate, he said.

The DSE's market capitalisation rose 16.43 per cent between January 1 and July 12. The market capitalisation of blue-chip stocks increased by 12.8 per cent, according to an analysis of the UCB Asset Management Company.

"Our blue-chip stocks are under-valued because people love to invest in speculative stocks," said Md Saifuddin, managing director of IDLC Securities.

"Local investors are driven by emotion, so the blue-chip index is lagging," he said.

He said analysis-based investors invest in blue-chip stocks. "Blue-chip stocks are relatively less volatile and respond slowly to the market movement. It proves that the blue-chip stocks are safer."