October ordeal at CSE persists; Rs. 179 b in value wiped off so far

The October ordeal as exclusively speculated by the Daily FT early this week is persisting at the Colombo stock market, with Rs. 179 billion in value wiped off – just Rs. 2 billion short of being the biggest monthly loss for the year.

The continuity of the miserable run saw the market dip further yesterday with the All Share Index’s year to date negative return topping the 5 per cent mark and MPI’s contraction crossing 20 per cent. As at end September the ASI had a positive year to date return of 2.2 per cent whilst the market capitalisation was Rs. 2.43 trillion as opposed to Rs. 2.25 trillion yesterday. In recent history, June had the worst loss in value amounting to Rs. 181 billion.

Analysts feared that unless bargain hunters return in hoards or sentiments improve, the CSE could mark the biggest monthly fall in value today.

For the second consecutive day, turnover at the Colombo bourse at Rs. 689 million was its lowest for the year. Indices dipped sharply yesterday in comparison to Wednesday, though volume of shares traded improved.

NDB said it was yet another disappointing day for the investors as the ASPI lost 65 points breaking a support level at 6,300.

“While low liquidity levels suggest the investors are uncertain whether to buy or sell, more margin calls triggered forced selling. More margin calls are likely to be witnessed (today) due to the steep drop which continued from Wednesday,” NDB added.

Arrenga Capital said nothing could restore market momentum with the recent retail dominance seen on a slow run.

“Market has reached its fullness of speculative trades to now fan off the flames of the speculative run-ups, which in turn has caused a serious tumbledown. Several high net worth individuals, who have been active in the past few weeks, too had quietened after SEC sharpened its investigation eye,” it said.

“However, the market has reached its point to understand that it is the value investors who would outperform speculative ones in the long run after most of the speculative-run portfolios making losses. Right now, we would advise our investors to have a short term selectivity structure drawn up, to hit on the counters due to announce strong 3Q2011 earnings,” Arrenga added.

Noting that market PEs have been on a declining trend DNH Financial expressed belief that the current multiple of 16X does not fully reflect the valuations of a number of fundamentally strong stocks which are trading at multiples of below 10X.

“With investors having pushed up the price of lower quality companies during the 2009/2010 bull run, an opportunity to invest in companies of higher fundamental value now exists with significant upside potential of reversing relative underperformance. With trading volumes showing increasing signs of declining, we believe that the market is coming close to consolidating before changing course towards a rerating. Consequently, with the majority of 3Q2011 results yet to be released, we advise investors to take advantage of this window period to select stocks that are likely to outperform based on solid intrinsic values,” DNH added.



Box