The Bangladeshi market is small – a total market capitalization of a little over $40bn. Putting this into a South Asian context, the combined value of every company on the Dhaka exchange is a little larger than India’s single most valuable bank. However this small corner of the Asian market presents a rich source of investment opportunities for investors that look, unperturbed by political proceedings.
Much like its giant neighbour, Bangladesh is blessed with a mixture of local family companies and a range of listed multinationals which provide ample investment opportunity. However, whereas India has many listed Public Sector Undertakings, the Bangladeshi equivalent are far higher quality from an alignment perspective. There are a handful of entities with core long-term shareholders who imbue their operations with a sense of dharma, of which BRAC Bank would be a prime example. The bank’s mobile payment system, bKash, has just become the largest on the planet, having attained 20 million subscribers in just 4 years. In a country where just 7% of the population have access to formal savings yet 40% have mobile phones, the financial inclusion opportunity is tremendous.
Consequently, it is no exaggeration to say that we have found it easier to identify new high quality ideas in this corner of Asia than in South Korea or China, markets of trillions of dollars in size, over the last two years. The limited size of these companies means that none can be large positions in our clients’ funds, but equally the combination of an impressive management team, sound business model and small market capitalization gives us great cause for optimism about the possible ten year returns for clients investing in Bangladesh.Bottom-up stockpicking has occurred very much in spite of the top-down political situation. Bangladeshi politics have never been smooth but have reached a new nadir in 2015. One of the two political parties has used its turn in power to attempt to hold on indefinitely. Over 10,000 opposition members have been jailed, the third largest party, Jamaat-e-Islami, has been banned, and civil society hugely undermined. For now, security seems an issue but not a systemic threat. Corporates are used to these sorts of occurrences in any case and seem to get on with business paying little attention. The only way you would know a strike had been called is that the streets seemed void of Dhaka’s usually horrific traffic. This sense of progress in spite of politics is in many ways analogous to the broader macroeconomic picture. Despite ineffectual and often paralyzed government, the economy has grown incredibly consistently at 5-6% per annum for around two decades. Two key sources of foreign earnings – the garments sector (which makes up 80% of exports) and overseas remittances from the six million Bangladeshis working in the Gulf and the West make up over 10% of GDP – are very important to domestic economic stability. The Bangladeshi Taka is underpinned by a balanced current account and is one of few currencies in the region with appreciative pressure. Notwithstanding that the country remains a very risky investment destination – not least because of the long-term threat to social and political stability from climate change and rising sea levels – there are aspects of the macroeconomics which give us comfort.
Bangladeshi progress has strong foundations; the country has become hugely more developed on almost all social indicators over the last two decades. Today,
Bangladeshis remain less than 60% as rich as their Indian neighbours. Yet they live longer, the infant mortality rate is lower, female literacy is higher and infant immunization is higher. Gender is a particular bright spot. In stark contrast to its neighbours, a greater proportion of girls than boys are in school. The fertility rate has fallen from over 6 children per woman to just over replacement rate of 2.1 in 40 years. The country has the eighth lowest gender gap in political empowerment and the country’s most competitive industry, the garments sector, is 85% staffed by women. The startling development gains have, in contrast to most societies, been shared rather equitably amongst rich and poor. Bangladeshi NGOs have been critical in achieving these outcomes. Grameen and BRAC are the two largest and most famous. The contrasts are stark: where Grameen is relatively focused, BRAC is sprawling in its interests; where Grameen feels ideologically rigidly wedded to the founder’s principles, BRAC is continually evolving.It is the latter that, driving around Dhaka, you are constantly reminded of. On one street one can simultaneously see a BRAC handicrafts shop, BRAC silk merchants, a billboard for BRAC milk towering over a BRAC chicken stand. The group forms something of a shadow state, providing schooling, health and other social services through over 115,000 staff. Without BRAC, Bangladeshi fertility, infant mortality and illiteracy would no doubt be far higher.
We have visited Bangladesh twice in the last six months and on both occasions we have returned with a handful of new company ideas. Bangladesh remains a rich seam of high quality companies in which we may invest client’s capital for many years to come.
Jack Nelson is an Investment Analyst at Stewart Investors.