Bargains in battered bourse?

The Colombo stock market had its worst and most embarrassing sessions last week as Rs. 85 billion in value was wiped off bringing the loss since mid-February peak to a staggering Rs. 281 billion.

The benchmark ASI dropped by 3.54% bringing the year to date negative return to 1.5%. The week also saw ASI relegated to negative return territory for the first time this year. The Milanka Index shed 4.5% increasing its miserable presence in negative territory to near 15% or 14.61%.

ASPI dropped below 6,500 mark on Friday to post a new low since December 2010 while MPI dropped once below 6,000 mark, a new low since September 2010.

• Rs. 85 b in value wiped off last week; Rs. 281 b since mid-February peak as Colombo stock market registers 1.5% year to date negative return; MPI down 15%
• Over 50 stocks establish new 52-week lows last week
• Analysts say based on low PE’s select stocks up for grabs on value

Over 50 stocks including Sri Lanka’s premier blue chip JKH (Rs. 192) and other top heavyweights such as Dialog (Rs. 7.90), Spence (Rs. 133), LOLC (Rs. 90) and DFCC (Rs. 129) saw their share price plunge to the lowest level in the past 52 weeks.

Asia Wealth Management said bearish sentiments continued to cripple activities at the Colombo bourse. “This highlights the fact that our investors are immobile, practicing a cautious approach over the market,” it said.

“The downward trend persisted throughout the week’s trading amidst a continued liquidity crunch,” noted Acuity Stockbrokers. “The market has declined 16.3% from its peak of 7811.82 in February 2011 relative to the rally in 2010 which saw the market peak at 7147.77 and record a dip of 12.5% to bottom out at 6257.01 in less than two months,” Acuity added.

Last week’s fall reiterated forecast by some analysts that the market has more room to dip further though others opined correction from overheated levels was over.

Irrespective of these assertions most analysts maintain that at current prices, investors have lot of bargains when it comes to fundamentally sound blue chips and second tier stocks.

Independent observers said that it was high time that institutional investors returned to the market as prices are attractive. “The economy and the market has great upside in the medium term so institutional investors have no other option but to return to the listed equities,” they added.

They also opined that whilst institutions kept away due to volatile run of speculative stocks in recent months, they have lost steam and the market was settling down to more realistic levels. This facet they cited as an added reason why institutional investors should return to the Bourse.

Some linked the sharp dip in recent weeks to retailers dumping some of the fundamental stocks to hold on to speculative counters. Forced selling was another reason for the market’s dip.

In recent weeks the phrase overregulation has resurfaced with most pointing fingers at the Securities and Exchange Commission (SEC) and the Colombo Stock Exchange (CSE). Rigid credit rules, the continuity of the price band both imposed by the SEC and approval of new listings by the CSE at a rapid pace which have sucked liquidity were some of the popular qualms.

Independent observers said that whilst there is some credence in these arguments, absence of institutional investors as well as lack of higher participation by foreign investors were bigger issues.

Midst these concerns the country’s macro-economic fundamentals have improved which analysts said investors must take serious note of. “Interest rates will remain low as well as inflation. The economy will grow at high 8% levels whilst the country’s reserves have got a boost following the successful US$ 1 billion sovereign bond last week,” they added. Furthermore June quarter earnings season will be resilience of the corporate sector as well.

“All these make the outlook for the market is positive,” analysts added.

Whilst Acuity Stockbrokers said valuations on fundamentally sound stocks with earnings potential offer attractive investment opportunities at the current price levels, the immediate direction of the market remains volatile.”

Nevertheless it said corporate earnings for the June quarter are expected to flow in next week which “will present attractive valuations at current levels, which should give some impetus to investor sentiment and market momentum.”

“Daily turnovers were driven with the support of few small to midsized transaction on selected blue-chips indicating the fact that the high net worth and the corporate remains confident while sticking to the fundamentals,” Asia Wealth said. “However we expect the re-entrance of foreigners to the market could put a u-turn towards the activity levels in the future which, in turn would build up the confidence level of our local investors,” it added.