SEC watchful of stock bubble amid low interest rates

Wednesday, 28 May 2014 00:00 - - {{hitsCtrl.values.hits}}

SEC says no bubble yet despite surge in trading
Regulator warns investors not to play casino with stock investments
45 companies in pipeline for listing in 3 years
Exchange demutualisation by end 2015; listing in 2016

Reuters: The stock market regulator is monitoring the risk of a potential bubble forming with a surge in trading activities and amid low interest rates, the Head of the Securities and Exchange Commission said on Tuesday. Average daily turnover has risen to $ 7.8 million this year compared with $ 6.4 million last year, with stockbrokers saying lower interest rates have compelled local investors to shift funds to riskier stocks from lower yielding fixed-income assets. “The bubble is when you go and start chasing penny stocks. That situation we don’t see yet... we are watching. We keep cautioning people not to play casino and invest intelligently,” Nalaka Godahewa, the Head of the exchange, told Reuters. “At the moment we do not see it as a bubble because the P/E levels are below 15 and more active stocks are fundamentally strong ones,” Godahewa said. The Central Bank has slashed the repurchase rate and reverse repurchase rate by 125 basis points (bps) and 175 bps to the their multi-year lows of 6.50% and 8%, respectively, between December 2012 to January this year. The yields in Government securities have fallen between 387-543 bps to 6.57% and 7.02% since the Central Bank’s dovish policy stance from December 2012, leaving investors with little choice for risk-free investments. Confidence in Sri Lanka’s exchange, with a market capitalisation of $ 20.21 billion, plummeted in 2011 after hitting a record high of 7,863.74 points amid suspected market manipulation and insider dealings. On Tuesday, the index ended 0.4% lower at 6,267.44. Godahewa said legal action has been taken out against the suspected cases of market manipulation to instil confidence. But analysts say many local investors who actively traded are still keeping away. Godahewa said some investors are still stuck with negative margins as they invested with borrowed money in 2011 and 2012. The SEC’s efforts to get more companies listed on the exchange have yet to bear fruit. Only a few companies have been listed since 2009 despite a surge in the stock market .CSE after the conclusion of the country’s 26-year war in May 2009. Optimism over post-war growth produced gains of 125% in 2009 and 96% in 2010, but the trend reversed with losses of 8.5% in 2011 and 7.1% in 2012. The market is still on a recovery path after edging up 4.8% last year and is up 6.1% so far this year. The country has witnessed a sustained average economic growth of more than 7.4 in the last four years through 2013 mainly due to State-led massive infrastructure projects financed by foreign commercial loans. However, sluggish consumer spending due to high taxes and low disposable income has compelled a lot of private companies to postpone their investments and expansion, economists say. “Companies need to raise capital only when they grow. If the country can sustain its economic development activities and the enthusiasm among the companies, they want to grow. They will need money and they will need options of raising money through equity and debt,” Godahewa said. However, he was optimistic about overcoming the challenge of getting companies listed. Forty-five firms are in the pipeline to list within the next three years, but he did not elaborate. Godahewa also said the SEC was in the process of valuing the Bourse for demutualisation. “Our target is end-2015 to finish demutualisation. If we can finish the demutualisation by 2015, within the next one year, it should be listed.”

Stocks fall to 3-week low; blue-chips tumble

Reuters: Stocks fell to a three-week low on Tuesday led by select blue-chips like Sri Lanka Telecom PLC and conglomerate John Keells Holdings PLC, while trading in shares of some financial firms boosted turnover. The main stock index ended 0.41%, or 25.58 points, lower at 6,267.44, its lowest close since 7 May. The day’s turnover stood at Rs. 1.38 billion ($ 10.58 million), more than this year’s daily average of 1.02 billion, helped by Multi Finance PLC, Entrust Securities PLC and Asia Asset Finance Ltd. The Bourse saw a net foreign inflow of Rs. 35.6 million on Tuesday, extending the year-to-date net foreign inflow to Rs. 1.87 billion. Stockbrokers expect the market to gain in the near future due to lower interest rates after the Central Bank kept key rates at multi-year lows on Tuesday for the fourth straight month, as expected. Shares of Sri Lanka Telecom PLC fell 5.74% to Rs. 46, while John Keells Holdings PLC fell 0.38% to Rs. 233.10. Both stocks dragged the overall index. After the market closed, Keells said its March-quarter net profit fell 9% to Rs. 4.68 billion. Multi Finance PLC ended 0.6% up at Rs. 16.70, while Entrust Securities PLC rose 1.46% to Rs. 20.80. Asia Asset Finance PLC ended flat at Rs. 1.80 a share. The market has been on a rising trend since mid-March as many investors were compelled to return to the stock market because low interest rates have made fixed-income assets less attractive, stockbrokers said. However, analysts have raised concerns over sluggish economic growth due to lower credit growth and consumer spending. Despite a multi-year low interest rate regime, data showed private sector credit grew 4.3% in March from a year earlier, the slowest expansion since May 2010. The latest trade data, released on Monday, showed imports have gained 8.2% in March, while exports hit a record high of $ 1.07 billion helping to narrow the March trade deficit by 15.5% compared to a year ago. Central Bank Governor Ajith Nivard Cabraal on 19 May said Sri Lanka’s private sector credit growth would pick up to around 15% by the end of this year and continue to improve through 2016.