By Danushka Samarasinghe
Is the Colombo Stock Exchange (CSE) finally putting aside its losing streaks? With the first month of 2014 just over, signs are surely encouraging with the All Share Price Index (ASPI) having gained around 250 points representing a YTD gain of 4.2 percent, which is good considering that we are just focusing on a single month’s return.
However, the ASPI has to further advance by another 245 points if it’s to reach last year’s high of 6463 and grow by a humongous 1,580 points if to break the all-time high of 7798 achieved in February 2011. Though we may not see a market rally similar to the ones in 2010, and the first quarter of 2011, what we see today is promising, an end to the southward march of the CSE since May 2013.
What has really changed?
What has really changed from last year? Back in 2013, we knew that interest rates are falling, exchange rates are likely to be stabilised, single digit inflation becoming a norm and as per the Central Bank statistics, the country’s fiscal position was improving and albeit these positive macroeconomics were not reflected in the CSE.
The Securities and Exchange Commission (SEC) also relaxed many rules and regulations in an attempt to revive the stock market to no avail. This posed an ambiguous question to many as to why Sri Lanka’s stock market is not reflecting favourably to the positive financial information available in abundance.
My thinking is that the market lacked confidence and the reversal of the CSE’s losing trend witnessed in January was due to the local market participants rekindling their poise and believing in better financial fortunes largely after witnessing an actual reduction in bank lending rates.
Since mid-2013, Treasury bill rates, bond yields were heading south and were followed by deposit rates though the lending rates refused to budge till recently. Active foreign participation was witnessed in the market along with sporadic local HNWI activity in 2013, similar to what we saw in January 2014. Local institutional participation was nothing to boast about last year or has it changed thus far in 2014.
The status quo of the country’s macro situation is also remaining unchanged apart from the added uncertainty of what could boomerang at the United Nations High Commissioner for Refugees (UNHCR) sessions in March, thus the only change is the dip in real lending rates within the banking sector, which has given a boost to the CSE.
Interest rates fall
The fall in interest rates is good for the economy since this is likely to propel economic activity and investments as long as inflation could be tamed. Therefore, the expectations of better economic prospects are likely to be reflected in the stock market with market participants quick to factor in these changes.
However, I believe the stock market gains in January are not that far thought but a reaction of returning confidence among the local investors and traders - which is good, since no matter how strong the fundamentals are, if the market lacks confidence, it will remain lacklustre and the potential gains would be subdued.
Also, the recent Central Bank announcements and plans on the banking and finance sector consolidation too managed to bring back some local investor interest to th e CSE. In times the local investors are gathering their strength it is always good to have the foreign support to maintain market momentum and YTD 2014 overseas activity at the CSE has accounted for more than 35 percent of the turnover.
We tend to think that the foreign institutional investors normally have a more holistic view on any market and hence, robust foreign activity as witnessed in the CSE since 2013 is a strong positive.
While this holds ground, we also need to remember that this group of institutional investors are less likely to be fooled and their level of interest could wane if any adverse macro conditions materialise or if future corporate earnings become weak, irrespective of the number of overseas roadshows done by individual brokering houses or the regulators.
Better times ahead
All in all, the start of 2014 has given hope for us the participants, investors and traders at the CSE that better times are ahead. Nevertheless, better times are not a guarantee that we all would make money, no matter how buoyant the market becomes our fate could be the opposite depending on what choices we make and actions we take.
Though may not be the best advice for every occasion, at times like this, when we are returning to the market putting aside the nightmares of 2011 to mid-2012, it might be better to follow the foreign institutional investors. My conviction on this basis remains high since most of the overseas institutional investments at the CSE are of medium to long-term focus and we also could piggy back on their in depth research-based stock picking.
However, due to timing of entry, we might not be able to gain the same price points though downside is limited, since we are unlikely to be the unfortunate takers of their offloading. Nevertheless, this doesn’t mean that chasing up a stock to exorbitant multiples given the premise of strong foreign buying is in anyway an intelligent behaviour.
Some rationality should prevail to any type of madness. In January, foreign investor interest was evident in blue-chip companies, to name a few - Commercial Bank, Hatton National Bank, Ceylon Tobacco, John Keells Holdings, Dialog, Expolanka, Tokyo Cement, etc.
Seeing this overseas attention, which was sustained during the past six months, some local HNWIs too have followed the same path. Yet, we, ordinary folk, still find it difficult to set aside the notion that absolute per share price doesn’t have any inclination to the potential of returns, which is the reason for us flocking around low priced shares, which we can buy in abundance and shy away from solid stocks, which may be more than 100 bucks per share.
Beefed up trading
Also, last few weeks, we saw beefed up trading interest in the finance company stocks, following the consolidation guidelines issued by the banking regulator. Though cumulatively the trading of finance company stocks didn’t count to more than 10 percent of the total market turnover, the gains generated were difficult to ignore.
During the past three weeks, The Finance stock gained over 100 percent, SMB Leasing increased 85 percent and Bimputh Finance gained 34 percent, while these are just the three highest price gainers within the sector, many other finance company stocks also recorded double digit advances.
However, the stakes are high and the trading community needs to wade these murky waters with eyes wide open, since most of the gains on these finance company stocks were fuelled by speculation and grapevine with no tangible information. Speculation and rumours are part of any market dynamics and any action taken to stop such would be futile, though takers of such information need to be mindful of how close their actions are to gambling blindly.
If pockets are deep and losses can be absorbed, such high-risk bets on stocks with negative book values could be within the boundaries of sanity, though people need to be bold enough to take responsibility of their actions without blaming the brokers, regulators and everyone in between of foul play when the stocks go south.
The year 2014 has started with a positive momentum for the CSE and prospects seem promising. While the market is a gathering of many minds, we, ordinary folk, also need to have a rationale mind of our own in making our trading or investment decisions without blindly following the flock.
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By Danushka Samarasinghe
