Regulatory corrective measures backfired?

By Jithendra Antonio


Asia’s best stock market, the Colombo Stock Exchange seems to have lost its steam, presumably temporarily. Market analysts are of the view that the several ‘testing runs’ imposed by the market regulator to control the market and safeguard investors, have back-fired.

“I think fundamental causes for this downturn are the deadline on limiting broker provided credit by June 1 and the circular on limiting the banks’ exposure to stocks”, a top industry analyst told Mirror Business.

He explained that the directive on reducing banks’ exposure to stocks by March 31, 2012 will make banks to re-examine effects of providing credit to investors through subsidiary brokering firms.

“I believe the market is at a certain maturity stage, and we cannot expect 1% to 2% daily gains as before, when the indices were in three thousand levels,” he pointed out.

Though there was an over 90% return last year, investors cannot expect returns above 15% to 20% from current performing levels of the Colombo bourse.

“If 20% is insufficient, those investors will definitely move out,” he remarked.

Meanwhile, Hijas Suhair, Assistant Manager – Corporate Advisory & Capital Markets at Merchant Bank of Sri Lanka PLC (MBSL) said, during the last few weeks, the share market has been signaling a downward trend.

He said that by mid March an upward trend was set, though it did not sustain in the latter part of the month.

“The credit clearance targets set since last year has made the market act indifferently, but it did bring stability to the inflated situation prevailed with stocks which lowered real value. Further, the reputational damage internationally also contributed to market hiccups” he said.

However, he pointed out that high net worth individuals have focused on certain shares during the year 2011, which are mostly undervalued but with growth potential.

This situation has in fact made certain shares to seek high price increases and other investors to be bullish on those stocks, since the entry by high net worth individuals.

“The most awaited banking sector rally has not yet materialized. But we observed certain banking stocks being collected by institutions and foreign investors. Higher cash liquidity has made banks to generate lesser return on capital, a key issue that has to be resolved by banks in the future. Nevertheless, construction sector stocks have attracted certain investors” Suhair added.

He said it is important that all investment bankers and stockbrokers consider foreign investors as the way forward to sustain growth in the Colombo Stock Exchange.

“Further, different levels of risk taking investors should be introduced to the Sri Lankan market than investors who consider only low PE stable markets,” he said.

Continuing the negative trend, both benchmark indices of the Colombo bourse ended in the negative territory as ASI lost 57.34 (-0.79%) index points to close at 7,213.33, while more sensitive MPI closed at 6,691.33 losing 43.00 points (-0.64%).

source - www.dailymirror.lk