SEC Chief tells investors to look to fundamentals than merely following the herd

Friday, 28 February 2014 04:13 - - {{hitsCtrl.values.hits}}

Says problem is in institutional investors for behaving as followers
Commends local capital market for having fundamentals in place although not “big league” yet
Notes local equity market a “compelling one,” opines next target reaching market cap of 50% of GDP

By Shabiya Ali Ahlam With the Colombo stock market turning bearish in recent weeks, Securities and Exchange Commission (SEC) Chairman Dr. Nalaka Godahewa on Wednesday urged investors to look at fundamentals rather than merely following the herd instinct. “Most industries are doing well and showing high potential for growth and it is time for us to look at fundamentals and facts over mere trends,” said SEC Chairman Nalaka Godahewa during his address at the Capital Market Conference (CAPM) 2014 organised by UTO Edu Counsult. Godahewa highlighted that the booking of profits by large foreign players often results in a drop of the market index, which is misunderstood as the beginning of a market downturn, leading people to hit the panic button. Their negative market behaviour then results in a negative trend, he said. “The problem with retail investors anywhere in the world is that they are mere followers of market trends. They buy when the indices show positive signs and sell when indices show negative signs. This has always been a fact in our market. You can’t blame them. The problem is when our institutional investors also behave the same way. Some of them repeatedly miss opportunities in the market as a result,” asserted Godahewa.

Acknowledging that the local capital market was yet to reach its full potential, the SEC Head however commended it for getting the fundamentals right. Listing out four pillars essential for the successful development of a capital market – macroeconomic stability, a sound and efficient banking system, solid institutional frameworks, and adequate regulation and supervision – Godahewa expressed: “Even though the capital market of Sri Lanka is still not in the big league, we can proudly say that we already have these fundamentals in place.” With the Government adopting a number of measures to ensure the nation’s GDP reaches US$ 100 billion in the coming years, Godahewa expressed confidence in the stock market picking up. “In most of the regional countries, market capitalisation is as high as 70% of GDP. Using conservative estimates we can expect the market value to reach at least US$ 50 billion within about four years from now. Our capital market with market capitalisation of approximately US$ 20 billion belongs to a particular subset of the emerging markets called ‘frontier markets’. The investment case in Sri Lanka’s equity market is a compelling one.” He added that while the Colombo Bourse returned figures of an average of 32% year on year from 2008 to 2013, the overall Emerging Market Index and Frontier Market Index returned 12% and 4% for the corresponding period, which is not only attractive but also admirable. “We have been making significant progress, yet it’s a long journey ahead before our capital market becomes a significant contributor to the national economy. Our next target should be reaching market capitalisation of 50% of GDP,” opined Godahewa.