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The year 2014 is a promising year for the Colombo Stock Exchange (CSE). The CSE has recorded a year-on-year (YoY) growth of 14 percent in the broad market index while the S&P SL 20 Index has experienced a growth of 15 percent in the current year. The average daily turnover has already reached Rs.1,090 million while last year’s average daily turnover was only Rs.828 million.

Market capitalization, the total value of the market that was Rs.2,459 billion in the year 2013 has increased to Rs.2,817 billion within seven months in 2014.

The growth momentum we are experiencing is a cyclic movement of a market that was growing since mid-2012. It has recorded a growth of around 35 percent during the aforesaid period. The return to investment during this period is very attractive when compared to other forms of risk-free financial instruments.



What contributed towards the performance of the market?
Currently we are experiencing a bull market and there can be several reasons that fuelled this run. Given below are some of them.

• Increase in foreign participation

Attractive valuations attracted foreign investors and they are the net buyers in the market with net purchases of Rs.10 billion in 2014. They account for nearly 35 percent of the total market turnover of the CSE.

Experts believe that increase in foreign investments encouraged locals, specially the high-net-worth investors to enter the market.

• Conducive monetary policy

Theory refers to an inverse relationship between interest rates and stock prices. The gradual decline in interest rates since 2012 would have influenced the performance of the market. Decline in interest rates reduces the return to investment.

This would encourage investors to turn towards alternative investments including equity.

• Favourable macroeconomic conditions

The Sri Lankan economy has maintained an average growth of 8 percent while inflation remained at single digit levels for the fifth consecutive year. Favourable macroeconomic conditions would have had a positive impact on increasing investor confidence, performances of companies, etc.

• Initiatives taken by market stakeholders to develop the market

The Securities and Exchange Commission of Sri Lanka (SEC) along with the CSE and industry participants have taken measures to develop the market. A few of these initiatives were manifested through last year’s budget. Further on, the SEC took the lead of conceptualizing and implementing a ‘Ten Key Project Plan’ that addressed the key areas that were required to develop the market.   



Is the growth experienced in the market sustainable?
It is interesting to infer into the movement of the All Share Price Index (ASPI) and S&P SL 20 Index from 2012 to 2014. Both indices have recorded an upward trend and similarities could be drawn between the price movements of the two indexes. Differently stated, the two indices are strongly correlated. The performance of the ASPI is driven by fundamentally strong stocks in the long run. This is a healthy trend compared to the time period when the market was pushed up by penny stocks that lacked fundamental value. This was evident during the latter part of 2010 and early 2011. However, there are a few factors that investors should look sharp on.

• Even though the market is driven by fundamentally strong stocks, in the long run, there is a possibility of penny stocks entering the rally. It is vital to strike a balance between investing and trading if we are to continue this growth momentum. Investors should enter the market with the correct mentality.
  
   
• The local equity market is ideal for long-term investment and thereby could evade the influence of short-term fluctuations. A winning investment strategy would give prominence towards long-term investments.
  
   
• Markets are cyclic. Any market cannot continue to grow. Even developed markets experience market fluctuations. The price of a stock is a manifestation of the demand and supply for a stock. For an example, when the demand exceeds the supply, prices increase. The demand and supply of stocks are driven by market sentiments that are subjected to change. A smart investor would use these fluctuations for his benefit.

• Sustainable growth requires a balance between local and foreign participation. Retail investors should be more optimistic about the market and watch out for attractive valuations.

Are you interested in investing in a growing market?
Lucrative returns will attract many towards the local equity market. The following tips will enable investors to make wise investment decisions in a growing market.

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“An investment in knowledge pays the best interest.”
Benjamin Franklin
 

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Learn the rules before you play the game. However lucrative a market may be, an investor should do his homework before he invests. Study market trends. Read up on the performance of the company you wish to invest. One should draw up a clear investment plan and diversify his/her portfolio. You will be able to maximize the opportunities in a stable and growing market only if wise decisions are made when investing. Investment advisors in the stock brokering firm will assist the investor and advise him in selecting suitable stocks. Such investors will be able to minimize the risk while maximizing opportunities.

There is another segment of investors who enter the market without sufficient knowledge and suffer financial losses due to incorrect investment decisions. They blame the market for their wrong acts. This creates a misconception among the public about the market. Remember that the market is poised for growth and the return to investment will depend on the choices you make.

 

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“Look at market fluctuations as your friend rather than your enemy.”
Warren Buffet

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Smart investors would see opportunities in both. Such a mind frame will continue to foster a stable and growing market. Failing to understand the cyclic nature of the market, a few investors make rash decisions. This is unhealthy for a growing and stable market.

 

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“No man’s credit is ever as good as his money.”
Edgar Watson Howe

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Refrain from excessive trading on credit. Moving on, don’t invest all the money you have earned however lucrative the market may be. Invest a certain portion of your savings in a diversified portfolio.

 

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“I buy on the assumption that they will close the market the next day and open in five years. Only buy something that you’d be perfectly happy to hold if the market shut down for 10 years.” 
Warren Buffett

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The market is currently well poised for stable growth and is fuelled by fundamentally strong stocks. Growth will be sustainable only if investors invest with the correct mentality. The stock market is not a place to earn money overnight as it is a form of investment. Hence, investors should refrain from trading with the expectation of quick returns. It was this unhealthy mentality that created a bubble during the post-war era and later the bursting of it.

 

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“Education is when you read the fine print; experience is what you get when you don’t.”
Pete Seeger
 

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Earning money from the market does not end when you research and invest on a good stock. It is a continuous process. Follow the economic, social and political changes and be an informed investor. Monitor the contract notes (Bought Notes, Sold Notes, etc.) sent by the stockbroker firm and the CDS statement.

Further on, attention should be given towards the documents you sign at the point of opening a CDS account. Certain investors might prefer to allow their advisors to trade on behalf of them by signing a discretionary account. Yet, it is best if investment decisions are made by the investor after consulting the investment advisor.
Investors should be optimistic about the market and watch out for attractive valuations that are in line with their investment goals. However, it is vital for them to act with utmost responsibility if we are to maintain this healthy trend.