Bourse’s Bubble Bursts

The stock market took a tumble for the fourth consecutive market day on Thursday, led by blue-chips after making pyrrhic gains last Friday, as averred too in these pages in last week’s issue of The Sunday Leader.
The market saw the benchmark ASI fall by 178.35 (2.5%) and the more sensitive MPI by 163.97 (2.5%), in addition to wiping out Rs. 60.5 billion worth of shareholder wealth during this period. However on Friday it partially recovered, with the ASI gaining by 20.88 points (0.30%) and the MPI by 2.40 points (0.04%) to close the week at 6,892.56 and 6,439.30 respectively on a Rs. 1.9 billion turnover, similar to the recovery it made the previous Friday..
A market source said that the reason for the bourse’s downfall is because it’s is over-priced, the absence of foreigners make it worse. Though government controlled funds such as the EPF are there in the market, they can’t prevent its fall, he said.
What is needed to revitalize the market is for foreigners to enter the bourse, he said. However so far for the year and upto Thursday, the bourse has witnessed a net foreign outflow figure of Rs. 6.4 billion.
Previously locals expected foreigners to enter the market and went on a buying spree thinking that such overpriced stocks could be sold to the same, but that didn’t happen, not only didn’t foreign investors come; but some of them who were already there, either sold out or sold down their holdings, thereby assisting the stock market bubble to burst.
Adverse international reports on alleged human rights violations by the Government and its agents during the closing stages of the LTTE war also does not help to boost investor confidence, especially foreign, on the Colombo bourse.
Market capitalization as at Thursday was Rs. 2.4 trillion, with the Government targeting a Rs. three trillion mark by the year end. Market capitalization as at the beginning of the year was Rs. 2.3 trillion, a Rs. 0.1 trillion gain since. Market PER as at Thursday was 23.27 times.
The Securities and Exchange Commission in its 2010 Annual Report said that the PER of 25 times as at end last year made some foreign investors to consider the market relative expensive for an emerging market like Sri Lanka. Meanwhile the source said that a PER of 15 times would make the bourse once more attractive for investments.