Invest In Stocks With Good Valuations
- But Market’s Illiquid Status Of Such, Drawback
In a depressed market, such as that which is facing the Colombo bourse today, the time however is ripe for investors to buy good stocks at bargain prices an economist said.
Amal Sanderatne, Director, Frontier Research (Pvt.) Ltd., addressing a seminar on the economy with a focus on the stock market in particular on Wednesday (July 18) said that the market operates on the principle “buy low, sell high,” ie that when prices are low to buy such stocks and when prices move up to sell the same.
He said that foreign investors adopt this strategy.
Referring to the net foreign inflow of Rs. 23.2 billion that the market has experienced in the first half of the year,* he affirmed that this was possible because they were operating on the principle “buy low, sell high,” with a focus on investing in high value stocks.
Sanderatne said that the reason why local investors were staying away from the market were because they have had heard of peer stories, of their fellow investors getting their fingers burnt after investing in the stock market.
Such investors who lost their money were those who went after junk stocks. Sanderatne in his speech mentioned the importance of investing in stocks which have good valuations. But the problem facing investors who want to buy such stocks are the poor liquidity levels of such stocks as the shares of such stocks are in the possession of investors who don’t wish to part with them that easily, a veritable Catch 22 situation.
In related developments, Vajira Kulatilaka, CEO/director NDB Capital Holdings plc told reporters recently that investing in the stock market was high risk, but their investors who were previously interested in investing in gilt edged government securities were now looking at investing in the stock market (see The Sunday Leader business pages of 24.6.12.).
On the question of the fixed income market being more attractive to investors in a rising interest rate environment such as that which is prevailing now, Sanderatne told this reporter that a high interest rate regime is not a “constant continuity.” Hatton National Bank plc Managing Director Rajendra Theagarajah another speaker at this event said that investing in the fixed income market was not the road to sustainability. “Other avenues of investments have to be looked at,” he said.
Sanderatne said that the market would get over its depressed state if the island strikes oil in commercial quantities.
However that may be to quote excerpts from the lead story in The Sunday Leader business pages of 8.7.12. published under the heading “Ills That Ail Bourse,” it said: “.. Manipulators, with possible powerful political connections going unpunished and removing both the former Chairman and Director General of the Securities and Exchange Commission last year for going after these miscreants also do not help investors to have confidence on the Colombo Stock Market.
And last but not least, the abortive scandal involving National Savings Bank’s investment in the troubled The Finance Company plc where the latter’s shares were bought at a premium resulting in the former’s chairman’s (husband of the Chief Justice) resignation with no punitive action taken against him also do not lend credibility to the bourse.
Similar dubious investments which however have not been reversed or have gone unpunished involve the state controlled EPF and to a lesser extent by another state entity, ie the Sri Lanka Insurance Corporation, further help to add fuel to the fire. Meanwhile a Rs. 902.8 million average daily turnover during the period 1.1.12.-4.7.12., ie after removing a recent, extraordinary inter-company transfer of Rs. seven billion worth of shares may be misleading (if that transfer is included, then the bourse’s average daily turnover during this period rises to Rs. 969.6 million**) as the bourse leading up to the Aluth Avurudhu week and to date, ie from April 9 to 4.7.12., a total of 57 market days, passed the Rs. one billion mark only once (except on that aforesaid exceptional share transfer day where turnover surpassed the Rs. eight billion mark), over Rs. 900 million only twice, over Rs. 800 million thrice, over 700 million only six times and over Rs. 600 million 11 times. Turnover on 5.7.12. and 6.7.12. were Rs. 323 million and Rs.368 million respectively.
On the other hand during the review period the bourse recorded “low” turnovers of between Rs. 200-300 million, no less than 21 times.*** A stockbroker attributed this situation to investors not having money. The Colombo stockmarket is generally dominated by retailers. And a number of these retailers have lost their money after being cheated by those aforementioned manipulators, he said. So these appear to be the causes for the disease and now it’s up to the authorities to treat them, and not its symptoms (!) if they are interested in once more reviving the fortunes of the bourse.”
Wednesday’s event was organized by Acuity Stockbrokers (Pvt) Ltd. (See also page 34)
*It had increased to Rs. 23.6 billion as at Friday, according to Colombo Stock Exchange (CSE) data.
** It had declined to Rs. 920 million as at Thursday, according to a CSE source.
*** From 9.4.12. to 20.7.12., ie a total of 69 market days, the status quo vis-à-vis the bourse passing the Rs. one billion mark remained unchanged at one, over Rs. 900 million thrice, over Rs. 800 million four times, over Rs. 700 million seven times, over Rs. 600 million 13 times and turnovers of between Rs. 200-300 million (24 times).
MR Brings Down Bourse
Despite a three hour long conference inclusive of lunch which a section of the island’s stockbroking community had with President Mahinda Rajapaksa at Temple Trees on Friday (July 20), the market fell, recording a low Rs. 284.2 million turnover, while the benchmark ASI declined by 2.89 points (over that of Thursday’s close) to finish the weekend at 4,888.22 points and the more sensitive MPI fell by 21.45 points to finish last week at 4,309.59 points.
The market returned a modest net foreign inflow of Rs. 9.6 million.
“Among the decisions taken at this meeting were to extend the period of broker credit recovery from investors, not to harp or spread negative stories about the foreign exchange and money (interest) markets as those would stabilize by the year end allegedly according to institutions such as the IMF and for the Securities and Exchange Commission to go slow on alleged market manipulations and manipulators,” a stockbroker who attended this meeting told this reporter.
It was also pointed out at this meeting that certain sections of the media were spreading negative stories about the market.