Bourse likely to stagnate until political crisis resolved

• Rs. 7bn net foreign outflows since political crisis
• Market hopeful of return of State-run institutions/funds

By Nishel Fernando 

Sri Lanka’s stock market stakeholders expect the bourse to stagnate for the next few days amid accelerated foreign outflows due to the prevailing political uncertainty, and are of the view that a majority government would be critical to retain the enthusiasm at the Colombo Stock Exchange (CSE).

The All Share Price Index (ASPI) declined by 0.49 percent while more liquid S&P SL20 declined by 0.56 percent on Monday with a net foreign outflow of Rs 3.15 billion. The day’s turnover was Rs.4.1 billion. 

“We are seeing foreign selling getting absorbed by retail investors at the moment. There will be a ‘wait and see’ mode as there is no confirmation on the majority of the government. That will be the critical factor.

“Since there seems to be no majority for either party at the moment, the market is going to stagnate over the next few days and possibly turn positive if either party upholds the majority,”  Head of Research at First Capital, Dimantha Mathew told Mirror Business. 

He further said that once the political crisis normalises, the foreign outflows will also normalise to levels in early or mid-October, which was around Rs 0.5 billion. 
However, he noted that net outflows would continue due to emerging market selloffs.  

Candor Group Director Ravi Abeysuriya opined that as the sentiment has changed, the market will continue to rise, and expressed confidence that the political crisis would be resolved shortly.

“The trigger is that the current regime will stay in power and will be more business-friendly. I think, soon, we will see the institutional investors joining the bandwagon, and it will have a good impact on the market,” he said. 

JKH contributed to nearly Rs.3 billion of foreign outflows on Monday, driving the local ownership structure of JKH closer to 50 percent, from earlier 40 percent. 
“The foreign selling in JKH seems to be getting absorbed by a local buyer, which is also pushing the turnover. There seem to be 1 or 2 buyers who are heavily buying into JKH at the moment,” Mathew remarked. 

Brokers said business tycoon Harry Jayawardane had been aggressively purchasing JKH stocks. 

According to First Capital, around Rs.7 billion net foreign outflows have been recorded at CSE since the beginning of the current political crisis on October 26, while net foreign outflows year-to-date has been recorded at Rs. 16.46 billion.

Mathew pointed out that although the foreign selling side has been available for some time due to the foreign outflow trend from emerging markets to the US, the buyers were not available for the transactions to go through until the change of government takes effect. 

Mathew said that if the new government appointed by the President was able to get the majority of MPs on their side, it will positively impact the market. 

“If the new government manages to get the majority, then of course, it will tilt to the positive side, because we will see someone having the majority after a long time. This means the decision making in next one and half years will be easier and clear. That’s what is being reflected in the overall market,” he added.

However, if the sacked UNP-led government is able to form a minority government, he opined that the market would return to pre-crisis levels. 

Mathew revealed that several State institutions will shortly return to the market as several of them have commenced recruiting fund managers.

Mirror Business learns that the Sri Lanka Insurance (SLIC) has already begun reviewing stocks to play an active role in the market, while several other State institutions have also started reaching out to stock brokers. 

Mathew noted that the market players are widely expecting Employees’ Provident Fund’s (EPF) return to CSE by December, as it had already entered the secondary government securities market in October.