Investor forums and reviving the stock market

As the stock market is heading for the fourth consecutive annual decline this year, an investor forum was held in London recently, organised by the Colombo Stock Exchange. Undoubtedly advertising or creating awareness is fine. However have we missed out on higher priority initiatives?

Confusion over four Ps

The basics of “Marketing” refer to the “Four Ps”. The first P is for “Product” while the last P is for “Promotion”. Assuming it is in the order of priority, one could argue that greater focus should be on developing the product and promotion is of secondary importance. Even logically, it makes sense. For instance, if you aggressively market a substandard product, a customer would try it out once but wouldn’t repeat if the experience is below expectations. 

It is no secret that we rush to do the “promotion” part. Whether it’s the stock market or the tourism sector, we hear of foreign investor forums, global promotional campaigns, etc. One could wonder whether it is the relative ease or the luxurious foreign travel that prompts this action. Clearly, developing the product is far more difficult, time consuming and painstaking. However the focus should be on developing the product for a sustainable development in the stock market (or the tourism sector) in the long run.

In fact, in today’s age of social media, it is very difficult to hide a great product from the consumer. The consumer will get to know one way or the other and the importance of costly advertising is arguably losing its relevance.

Key factors to develop the product “stock market”

If stock market is the product that is sold to investors (both foreign and local), what should be done to develop the product “stock market”? 

Basically, an investor would be looking for the potential profits, the diverse investment options and the ease of entry and exit. Larger investors would also be concerned about the size, for if it’s too small they wouldn’t be interested. Simply put, these are the factors that the Stock Exchange should try to improve in order to attract 

investors.

Stock market profits

Although this is the most enticing of all factors for an investor, it is the one factor that is not within the control of the Stock Exchange. 

Usually, the share prices tend to gain when the profits of the companies grow significantly. The recent gains in the US stock market were backed by strong growth in earnings. Similarly the impressive stock market performance in Sri Lanka in 2010 was also supported by strong improvement in company profits. More often than not, this happens during times of high economic growth. While the US economy is currently growing at the highest rate in 15 years, Sri Lanka grew by 8% in 2010.  Therefore this particular factor is in the hands of the Government to accelerate the economy, which would result in attractive profits in the stock market. An economic growth of 4% and thereabouts for the fourth consecutive year for a small, developing economy is just not good enough to attract foreign investors.

Availability of diverse investment options

Assuming for some reason the economy revives at some point in the future, is the stock market positioned to benefit? 

The total value of the stock market is less than 20% of the size of the economy. Therefore even if the economy revives, it is not well represented in the stock market. In fact, none of the large exporters are represented in the stock market. Imagine how well those stock prices would have performed when the rupee was depreciating rapidly in recent weeks? It would have provided some respite to the hapless investors. 

The stock market also doesn’t represent the larger technology/software companies in Sri Lanka. It was the technology stocks that were driving global stock markets in recent times (Apple, Amazon, Facebook, etc.). The largest financial institutions, construction companies and a whole lot of other large sectors are not sufficiently represented in the stock market. 

None of the above entities would enter the stock market if there are no benefits. This is the area where the Stock Exchange should do a lot of work with the Government authorities to offer a compelling proposal to the desired companies to list in the Stock Exchange. A five-year plan to list at least 25 strong, diverse companies (such as what were mentioned above), is certain to attract a lot of new foreign investors if successfully implemented. 

Ease of entry and exit for investors

Another factor that the investors desire is how easily a share could be bought and subsequently sold. This basically refers to the frequency and size of transactions in the stock market. To improve that, a larger number of investors should actively participate (buy and sell) in the market. Therefore, promoting the stock market among potential investors (both local and foreign) could help in this regard. 

However the success would be greatly handicapped if not many diverse investment options are available. Therefore even to attract more investors and multiply the transactions in the market, appropriate companies should be listed (as described earlier).

Two key factors  to develop the stock market

In conclusion, two key factors need to be achieved for the sustainable growth of the stock market.

Firstly, the Government needs to direct the economy on a sustainable high growth path. Secondly the Stock Exchange should aggressively work with the Government to attract and list strong, diverse companies (exporters, technology, etc.) on a continuous basis, which could put the Sri Lankan stock market firmly in the radar of global investors. 

(The writers can be contacted via [email protected])