CSE’s bull run amidst need for smart investing

The year 2024 was probably one of the best years of the Colombo Stock Exchange (CSE) in its contemporary history. The All Share Price Index (ASPI) ended on 15,944.6, representing a gain of 49.7% while its market capitalisation increased to Rs. 5,695.6 billion, its highest ever. 

According to a news website, the shareholders of the listed firms were richer by Rs. 1.4 trillion by the end of 2024, with the dollar value of listed stocks up by $ 6.3 billion.

The upward momentum of the capital market is attributed to the prevailing low interest rate regime, re-rating of upside for equities following impressive corporate earnings, finalisation of external debt restructuring as well as the continuity of the IMF program. Importantly, the political stability guaranteed by an Executive and Legislature that possesses an overwhelming public mandate boost the confidence of both local and foreign investors. Even though former President Ranil Wickremesinghe’s administration was undertaking critical economic reforms to put the economy back on track, his Government did not enjoy public support and the pre-election uncertainty put the investors in a state of dilemma.

Meanwhile, the interest rate paid on one-year Fixed Deposits (FD) of the top-rated finance companies has come down to the range of 7.5% to 8%. Around 2022 and 2023, the FDs were granting interest rates of over 20%. Therefore, senior citizens could be tempted to place their savings on high-risk equity investments. 

However, one needs to realise that stock market is not suitable for pensioners and retired individuals given the high risks involved. It must also be borne in mind that due to the low interest rates, people could be deceived by Ponzi schemes that promise unrealistic rates of return. The Central Bank in particular has a duty to educate the general public about such manipulative schemes that could emerge due to the low interest rate-environment.

Smart investors who bought shares during 2022 and 2023 would have realised impressive returns over the last few months. Foreign individuals and institutional entities that invest in the bourse demonstrate this smart investing pattern. Net purchases by non-nationals in 2022 when the market plummeted was Rs. 30.63 billion. In contrast, when the market capitalisation of the CSE rose by almost 86% to Rs. 5,489.2 billion during 2021, the foreigners were net sellers to the value of Rs. 52.65 billion. Unfortunately, most of the local investors buy shares driven by the herd instinct without undertaking a proper due diligence. 

At the moment, the Market Price-to-Earnings ratio is hovering around 8 to 9 times, and there could be scope for upside movement in undervalued shares. Making sound investment decisions without being driven by emotions is the formula for success in capital markets. 

People should allocate only a portion of their wealth to equity investments without putting all their eggs in one basket. During the popular Bull Run from 2009 to 2011, even provident funds like the EPF made irresponsible investments without demonstrating caution and rationale. Certain stock brokers too were criticised for incidents of alleged pump and dump activities. 

The legendary investor Warren Buffet’s mantra: be fearful when others are greedy and be greedy when others are fearful is a tried and tested formula which all who aspire to succeed by investing in the stock market should follow.