Taking stock

AFTER consistent bloody war-related headlines, by end of 2009 and last year Sri Lanka in most financial press globally got captured for the performance of the tiny stock market. The 125% gain in 2009 thanks to pent-up euphoria among investors followed by 96% gain in 2010 propelled the Colombo Stock Exchange (CSE) to the league of frontier or emerging markets. Colombo was also dubbed as the most consistent best performer in the world apart from being Asia’s best. The Government and several of its key agencies trumpeted this achievement as the stock market is considered a front line business activity reflecting investor confidence. It was all tickety-boo.

However so far this year there has been more misfortune than hefty capital gains for investors. As reported in the front page today, figuratively there is (investor) blood on the market as many investors, especially retailers including small timers, have lost lot of money. Year to date the benchmark All Share Index has gained by only 2%, which considering some of the more advanced or emerging markets, may still look impressive. However the 2% gain is as opposed to 17.7% increase as at mid-February which means that much value has been lost. On 14 February when the Colombo Bourse was at its peak the market capitalisation was Rs. 2,600 billion whilst by yesterday it had lost Rs. 222 billion in value to languish at Rs. 2,378 billion.

If the Government or its agencies rushed to showcase the boom in the market as a sign of post-war confidence and rebound, then it is pertinent to ask the question whether a bust means doom?

The more knowledgeable analysts will vouch that boom or bust of the Colombo Bourse means it is neither the time to take a proper stock of the affairs.

Independent observers have maintained that post-boom run or the euphoria, some of the steps taken may have been out of misjudgment or even act of overconfidence and overestimation. In a regime of falling interest rates, the public simply had one route for better returns and that was the equities market. More investors and firms were encouraged to come to the market. Many did with belief and hope though in just six months, to some there was no turning back.

A multitude of regulatory and market development measures perhaps opened the flood gates with some entering the market both as investors and companies to list sans clear understanding of the implications. Whilst some officials may get away saying “what goes up must come down” or that investors must realise that “markets are never constantly on the rise” it is important for a sincere soul searching by all responsible capital market stakeholders.

Consider a few developments. To broad base the market a large number of companies were wooed to list. As part of Central Bank requirements all finance companies were required to list as well. These are welcome measures in the name of transparency and good governance. At one point a figure of around 60 new listings for this year was cited whilst so far 21 companies have already done so. Fearing or sensing an artificial bubble was being created in terms of value, the Securities and Exchange Commission (SEC) also implemented a series of measures and directives to discipline the market. This included formalisation of credit arrangements for investors by banning broker credit to clients but via margin providers, deadlines to settle past dues as well as imposition of price bands. These measures were contentious but the market has been forced to operate within the measures set. Some viewed the measures as akin to inviting investors to come in and then chocking the market.

There was also a further step by way of offering preferential high 40% allocation to retail investors in IPOs. The latter has, at least according to some analysts, aggravated the fundamental flaws in the market with most such retailers selling out on the first or second day in the secondary market at whatever profit. Highly speculative or stage managed bull runs leading to volatility has made institutional investors to stay away from the market. The more regular and big foreign funds are largely ignoring Colombo due to liquidity and other issues. The rush for listing and consequent private and public issues sucked nearly Rs. 50 billion in cash from the investing community.

Broad basing the investor base and luring more public to invest in listed equities is important but with market reeling timing of such measures may not be counterproductive. It is also certain that companies who are preparing or planning to list may be in two minds.

The early learning in the current state of the Colombo bourse is the need for a careful pacing of regulatory and market development measures. Regulators run the risk of being faulted for rushing through measures out of sheer arrogance or over confidence.  Investors also need to realise that capital market is high risk high reward, whilst the country at large and all stakeholders need to ensure a more sustainable course of development for the market. The Government too has to ensure that sound macro-economic fundamentals are not mismanaged but all efforts are nurtured towards a more dynamic all encompassing capital market.