Via The Financial Times, an interesting report on the volatile Dhaka Stock Exchange:

The Dhaka Stock Exchange had a roaring rally for much of this year, rising more than 90 per cent at its peak, fuelled by easy liquidity and a flood of new investors, with little experience – or expectation – of an equity market’s volatility.

But now Bangladeshi regulators must try to deal with a seriously overvalued market – the market is currently trading at price-to-earnings ratios of around 26 to 27 – and investors with no tolerance for any downward correction.

That difficulty came into clear view on Sunday, when hundreds of angry investors protested in front of the stock exchange after stocks tumbled 6.7 per cent, as a result of measures taken by regulators to cool the overheated market.

“It’s a difficult time for the Securities and Exchange Commission,” said Ifty Islam, managing partner at Asian Tigers Capital Partners, a Dhaka-based investment bank. “It’s not just a financial phenomenon, to some extent it’s a political phenomenon.”

Bangladesh’s stock-market is almost entirely driven by local investors, with just one percent of the market held by foreigners. Retail investors have also jumped into the market in recent years, with the number of retail accounts rising from 500,000 in 2006 to more than 3m now.

“Many of those stock market investors are first time investors – very new in the market, often buying without much fundamental knowledge, or analysis of what they are buying,” said Mr Islam. “They are buying because its going up. But if many of these investors take to the streets, it creates major challenges for the regulators.”

In response to Sunday’s protests, the Securities Exchange Commission increased the margin lending level by nearly 50 percent, and took other steps to add more liquidity to the market, which helped send shares rebounding by 4 per cent on Monday.

But given the current conditions, regulators rough ride isn’t likely to be over any time soon.