Stock market crash persists

• Year to date negative return tops 20%
• Rs. 45 b in value wiped off; YTD loss figure tops Rs. 400 b mark

The stock market crash persisted for the second consecutive day with more velocity yesterday as Rs. 45 billion in value was wiped off, propelling the year-to-date loss surpass Rs. 400 billion  mark and the negative return to over 20%.

The behavior of the Bourse was exactly the way the Daily FT yesterday hinted as selling pressure on margin calls triggered a crash.

As opposed to a 1.5% dip on Monday, yesterday’s fall was sharper by 2.5%, bringing the year-to-date negative return of ASI to over 20% with last seven sessions delivering 8% dip. MPI’s dip is now 17%. Market’s value lost Rs. 45 billion, adding to Rs. 371 billion already lost since start of the year.

The market capitalization sank below the Rs. 1.8 trillion level to close at Rs. 1.797 trillion, down by Rs. 416 billion from the Rs. 2.213 trillion at end 2011.

Brokers and analysts were hunting for sanity whilst fears have heightened as to how the Bourse will fare during the last two days of May. Some are hopeful the return of bargain hunters will salvage the Bourse.

However yesterday panic selling coupled with negative sentiments over SEC’s over regulation, concerns over macro economics led to 140 out of 280 listed companies touching their respective 52 – week low. This took the trailing market PER to 9.7X.

Margin calls with forced selling occur when brokers see a sharp decline in the portfolios of their clients, who usually deal in credit.

Nevertheless, the continued net foreign inflow remained uninterrupted as a net inflow of Rs. 212.8 million was recorded for the day. Year to date net inflow is a record Rs. 22.6 billion.

Turnover at Rs. 534 million too was better than Monday’s Rs. 395 million.

Heavyweight John Keells Holdings spearheaded the day’s turnover list with 28% contribution. The counter proceeded to register another block of 300,000 shares being crossed off at Rs. 188 per share, where a number of large trades were also taken onboard on the counter. It closed weaker at Rs. 187.8 with a 1.7% dip.

Interest persisted in both the Voting & Non – Voting Shares of Commercial Bank of Ceylon. The counters closed at Rs. 104.1 (-0.9%) and Rs. 74.9 (-2.9%) trading at attractive valuations. Meanwhile investors hasty reaction to Fitch ratings revision of National Development Bank’s outlook to ‘negative’ from ‘stable’ led the counter to trade at its 52 – week low of Rs. 108.0. Selling pressure also continued in tile manufacturer, Royal Ceramics, closing with a 1.5% dip at Rs. 97.5.

Many of the penny counters, Environmental Resources Investments (-9.3%), Colombo Fort Land & Building (-6.98%), HVA Foods (-3.0%), PC House(-4.9%), Swarnamahal Financial Services (-2.7%) and Blue Diamonds[Non – Voting] (0.0%), which had already beaten down badly, were seen at their respective 52 – week low yesterday.

Arrenga Capital said the sharp plunge in indices have driven a number of steady counters to trade at attractive valuations including Royal Ceramics (4.5X - FY13E), Vallibel One(4.8X - FY13E), National Development Bank (6X - 2012E), Sampath Bank (5.5X -2012E), Lion Brewery (8.6X – FY14E) and Distilleries (7.7 - FY13E).

“We remind value seekers to take advantage of the deep plunge and accumulate on weakness as the expected attractive earnings prospects of these counters would enable them to outperform the market in a turnaround,” the broker added.

DNH Financial sounded equally supportive.

“We advise investors to reposition themselves for a medium term investment horizon while focusing on companies that will deliver quality earnings over the 3Q and 4Q. We expect the performance of the bourse to be characterized by a series of mini-rallies and pullbacks that should provide healthy buying opportunities for fundamentally focused investors,” it said.

DNH is recommending investments in the industrial, banking, hotels, diversified and auto sectors, however using a highly selective approach as the chances of realizing gains on a beta basis in the current market environment will be highly limited. “With regard to collective investment schemes, we advise investors to cherry pick asset managers that adopt a highly active bottom up investment selection process with a sustainable track record,” DNH added.

The rupee fell to 132.00/10 against the dollar from Monday’s close of 131.10/131.20 on importer demand for dollars in light trade.