Sunday Oct 06, 2024
Sunday Oct 06, 2024
Friday, 6 December 2013 00:00 - - {{hitsCtrl.values.hits}}
As I was reflecting on the lack of growth and bounce in the stock market, my mind went back many years, to a conversation I had with the late Lalith Athulathmudali. Our friendship started when we were both at university in the UK. After he commenced his political career, we continued to meet from time to time. He told me that one of his ambitions (he had many!) was to create a society where every adult in employment owned shares. I think this idea was triggered by what he saw in Malaysia where he was lecturing for a few years.
I still distinctly remember his telling me that most people owned shares and were discussing shares all the time in KL and that they even discussed share prices whilst going up in the lift in the morning. (It is amazing how the mind sometimes retains some perfectly useless bits of information.) This intrinsically useless bit of information about discussing shares in the lift suddenly became useful as it triggered the thought of writing this piece about stocks and shares.
So for a start I thought I should find out what was happening in the stock market in Malaysia. A piece of research done a few years ago stated that 39% of the population owned shares and there were 10,239,000 shareholders. That information caused two blinks as it is quite staggering when compared to the scenario in Sri Lanka. A research study published last year said the number of shareholders at the Colombo Stock Exchange was 206,465. So we had around 1% and the Malaysians 39% of the population owning shares.
Three key questions
Should Sri Lanka try to emulate Malaysia? This was in effect the late Lalith A’s dream! Prior to answering this, there is the other preliminary question, namely, ‘Why increase the number of shareholders?’ If there is a good reason to do so, it will lead to the next question: ‘How do we get about increasing the number of shareholders at the CSE?’
Economic growth is entirely a function of investment. No investment, no growth! To create a dynamic private sector that drives economic growth, people must be encouraged to save and these savings will become investment when it is channelled through the stock exchange to companies to finance their growth. The profits from these ventures will go back to shareholder via dividends. This is the virtuous cycle of growth.
As the stock market is the conduit for channelling savings into investment, it is vital to create a vibrant stock market with a large number of shareholders. So it is more than a good objective. To create a really bubbling private sector that drives growth a vibrant stock market with many millions of shareholders is essential.
Why own shares?
It is a natural instinct of most people to want to save for the future. Keeping the money under the bed is not sensible. There are other options if one wants to touch the savings everyday, like keeping it in gold or silver or precious stones. Most people would not want to do this.
This then leaves the options of buying property or putting it in the bank or buying shares or securities of one sort or another like government securities or listed debentures. For most people, it boils down to a choice of deposits in a bank or finance company or buying shares. At present in Sri Lanka, deposits with financial institutions are easy winners of the battle for money – very different to the scenario in Malaysia.
Increase investment in shares
The fact is we do have a pretty dreary stock market. The major part of the daily turnover comes from a handful of shares and a part of this is from foreign funds going in and out of these blue chip shares. It is a fund manager’s way of life to pick up small profits regularly by going in and out of shares.
There is no mantra to create a vibrant stock market but common sense suggests that a number of things can be done to inject life into the market. To pursue this objective successfully, there has to be coalition of a number of parties working with commitment to create a buoyant stock market. This coalition must include the SEC and CSE, the brokers, the analysts and the public quoted companies.
The first step has to be to take the mystique out of it so that more people will feel comfortable about investing in shares
An idiot’s guide
There is a publisher that has produced a number of what they call ‘idiot’s guides’. They relate to all sorts of subjects. There is an idiot’s guide to computers and among others an idiot’s guide to diabetes! The objective of these guides is to tell the reader all they need to know in a very simple and easy to understand style.
There is a need to put together an idiot’s guide to ‘investing in shares’. This should go well beyond the buying and selling of shares, the stock market and brokers. It should also explain the market information that is published. It should also go somewhat beyond its subject of the stock market and carry a piece on public companies.
It should cover the whole story of the Companies Act, the guidelines of the SEC and the CSE, etc. The public must be given the confidence that public companies are regulated and controlled and that investors should have no fears about buying the shares of quoted companies. After all the drama with finance companies, this is essential.
More information is required
There is an important role for the research wing of stock brokers. Their role is to help investors understand the financial profile of quoted companies. They should increase the information that is published in the newspapers. To expand the market, it is essential to reach out to the public that read Sinhala and Tamil newspapers.
The information that is missing
The greater majority of small retail investors will not read research reports. They should get all relevant information from the daily papers. They should publish the earnings per share, the net assets per share, the price earnings multiple, and importantly the historical profile of the total shareholder return on all listed shares.
A brief comment on total shareholder return or TSR as this is not published in the papers and not in many annual reports! An individual invests in shares to obtain a return. This comes in two streams. The dividend and the increase in the value of the share.
If you add the dividend and the increase in the value of the share and express it as a percentage of the purchase price of the share, you get the total shareholder return. Then the investor can compare the return from different companies and can compare these returns with the returns from the rock solid option of government securities.
Naturally shares, as they carry more risk, must yield a return better than government securities. The specialists like analysts have to step in and help the small investors by providing a profile of likely future trends on performance.
It will be good if brokers publish condensed editions of their research reports in the papers, so as to improve information to retail investors. The orthodox view of the value of a share is that it is the present value of future streams of earnings discounted at the solid rate of return on government securities.
There are various adjustments that can be made to this orthodox formula, to arguably get a more realistic value. However, the unalterable fact is that the true value of shares is inextricably linked to future earnings. It would be helpful if brokers in their reports gave their views on the value of shares by discounting future earnings. Some bold action is required to get shares into a proper value framework and to create transparency in the stock market.
Liquidity – to buy shares they must be available
A main problem of the stock market is that in a large number of companies, the bulk of the shares are held by a few people. According to a recent report, 2% of shareholders control/own 95% of the stocks on the market by value. These are what could be called sleeping shares. The owners do not buy or sell their shares, consequently only a small part of the shares of many companies are on the market and being traded.
If the owners of these shares count their wealth everyday by multiplying their holding by the share price and believe that this is their wealth, they are living in a fool’s paradise. To turn their paper (share) wealth into cash, they will have to sell the shares on the market. It is very probable that none of them will be able to convert a very large parcel into cash. It is in the personal interests of the large shareholders to let go of some of their holdings and to put more shares on the market and help create a more buoyant stock market.
It is a long journey to create a stock market that mirrors Malaysia. Sri Lanka is basically a private sector-driven economy, with the State sector playing the role of a facilitator by providing the infrastructure. For the private sector to grow, a vibrant stock market is essential to funnel savings into investment in the private sector companies. It is a journey that must be undertaken.
(The writer has a Master of Arts Degree from Cambridge University, UK, and the AMP of Harvard Business School USA. He counts over 40 years of board experience having served as a Director of several companies in Sri Lanka and abroad. He was a Director on the main Board at Reckitt Benckiser PLC, UK, where he worked most of his career and at the time of his retirement was Global Director – Pharmaceuticals. He has served as the Chairman of the Board of Investment and Sri Lanka Telecom Limited and was a Senior Advisor to the Ministry of Finance. Currently, he serves as Chairman of Hemas Holdings PLC and First Capital PLC.)
