Bourse’s Fairy Tale Ends

The bourse returned a low Rs. 403.2 million turnover on Friday’s trading with market indices moderately down, but on the bright side the “big boys” ( “highly” traded) were good stocks, indicating that bona fide investors have had returned to the market coupled with the exit of speculators, a source told this newspaper.
If one looks at the main contributors to Friday’s turnover, led by Aitken Spence with Rs. 90 million, Ceylon Tobacco (Rs. 50 million), JKH (Rs. 44 million), Ceylinco Insurance and so on, those are all good stocks and cannot be construed as junk, he said.
But on the flip side, the bourse has to contend and compete with the interest rate market, with rising interest rates being a much more attractive instrument to invest in, rather than the riskier stockmarket, If one hypothises, that, if in the recent past the daily turnover averaged at Rs. one billion, Rs. 500 million of it has now been transferred to the fixed income (fixed interest) market, effectively cutting down the bourse’s daily turnover by half, he said.
The source further said that in the immediate aftermath of the terrorist war end 2½ years ago, there was pent up demand in the market, which took it up. “At that time Golden Key had crashed and interest rates were coming down, as such investors had no option other than to invest in the stockmarket,” he said.
On the alleged manipulators who took the market to dizzying heights at that time? They too have got their fingers burnt, the source said. How can one maintain a day in, day out turnover of Rs. 2-3 billion, that is not sustainable, the source said.
For one thing there is a liquidity problem in the stockmarket, so the next best option for those alleged manipulators then, was to trade in second tier stocks and below, he said.
But now that fairy tale has ended, and sustainability. however painful that may be, in that one now may not find the phenomenal growth rates made by the market in the past (of 100 point gains and so on in a day and even continuing thereafter),  has currently overtaken the bourse at the present, one may speculate.
However that may be, some stockbrokers have allegedly asked the Colombo Stock Exchange to restitute the ticker size to 100 shares from the present one, introduced after the implementation of the new automated trading system (ATS) which allows even the trading of a single share to take place unlike in the previous
Other negatives of the new system as pointed out by brokers were merging the trading of odd lots with normal trades and crossings and the ponderous requirement of allegedly having to fill in details of investors, whereas under the previous regime what was required was the filling in of only the investor’s identification number (see also last week’s business pages of this publication’s).
Meanwhile, on the previous day Thursday, large inter-company transfers of LB Finance and Hayleys, controlled by business magnate Dhammika Perera pushed up turnover levels that day, a source said.
S&P’s downgrade of Sri Lanka due to its falling foreign exchange reserves coupled with the US backed resolution against Sri Lanka on alleged human rights abuse during the closing stages of its war against LTTE terrorism (see also last week’s business pages of this newspaper’s), made worse by Itochu Corporation of Japan’s 60% share sale in Sathosa Motors (the buyer was Access Engineering owned by business magnate Sumal Perera) at Wednesday’s trading which resulted in a net foreign outflow of Rs. 805.69 million, underlined the fact that all is not well with the Colombo bourse.
“There is a fear that sanctions might be imposed on the island in the event the U.S. backed resolution is passed in Geneva, which is the reason why foreign investors are spooky about investing in the Colombo stockmarket,” a source said.
In the context of S&P’s downgrade, it may be moot to quote economist Indrajit Coomaraswamy, who, speaking at a function on Tuesday (a day before the news of S&P’s downgrade reached Colombo) emphasised the importance of country ratings as a conduit to attract investments (see also pages 41&43).
In the context of cheap/free money drying up due to Sri Lanka progressing to middle income status, he therefore said that it was important to have a good rating in order to entice foreign funds into the country.
But when this reporter pointed out how then was it possible for middle income countries such as Greece and Ireland which are going through a rough economic patch to attract cheap IMF fundings and such like where the interest charged was between 3-4%, Coomaraswamy in reply said that IMF money is not cheap, they are at market determined rates and they come with conditions, he added.
More or less in the same breath Coomaraswamy further said that if Sri Lanka goes to the market to raise funds, the interest charged would be over 7% for such borrowings currently.
He however said that with central banks world over (ie in the USA and in the West) pumping money, there was plenty of cash available for investments in frontier and emerging markets as interest rates fetched/paid in developed markets were a low 1-2%
However such money were coming into countries which had a surplus in their current accounts. “The recent economic adjustments (ie the free float of the rupee and electricity and fuel hikes) were a move in that direction,” said Coomaraswamy.
Meanwhile the bourse returned a Rs. 1.7 billion turnover, with market indices gaining by 26.42 points (0.49%) and 3.63 (0.67%) respectively over that of the previous day Tuesday’s close at Wednesday’s trading.
Melstacorp Ltd., a company controlled by business magnate Don Harold Stassen Jayawardena which triggered the Securities and Exchange Commission’s mandatory offer code after it bought a 30% stake in blue chip Aitken Spence plc recently, further increased its stake in Spence when a seller acceded to the mandatory price of Rs. 115 a share, by parting with 1.25 million shares of Spence at Wednesday’s trading.
But the new ATS in the Colombo stock market which came on board on February 24 for an undisclosed sum continued to bug stockbrokers for the second consecutive market day, at Monday’s trading as well.
Among its ills listed were having to allegedly enter all details of the investor (previously only his or her’s identity number had to be entered) which increases bureaucracy, trading of odd lots merged with the trading of normal: lots and crossings, and the possibility of buying just one share as opposed to buying a minimum of 100 shares in the previous, all acted negatively on the bourse, a source said.
He said that introducing international best practice vis-à-vis the ATS does not hold water as the volumes here are low, compared to those in developed markets.
The source further said that the US backed resolution against Sri Lanka was also having a negative impact on the market, though the market has had experienced net foreign inflows during the past few market days, but on Wednesday it experienced a net foreign outflow of Rs. 805.69 million and on Thursday Rs. 160 million.
Foreign buying generally gives a thrust to the market.
On Tuesday, Melstacorp upped its stake in Spence to 42% when it bought more than a 10% stake of the company from state controlled Sri Lanka Insurance Corporation at the mandatory offer price of Rs. 115 a share (upped from the earlier ”erroneous” price of Rs.112/80 that triggered the mandatory code), contributing Rs. five billion of the Rs. six billion turnover made that day.