The culprits!

By Indika Sakalasooriya

The Colombo Stock Exchange (CSE), which was amongst the top capital markets globally, has experienced a sombering 2011 thus far, as a result of factors that centered the steep rise of the anonymous retail investor, a recent research report by CT Smith Stockbrokers pointed out.

As the report described, the phenomenal growth recorded by the post-war market and awareness campaigns carried out by the CSE and the market regulator has resulted in an influx of small scale investors to the Colombo bourse.

“As at July 2011, 74, 000 Central Depository System (CDS) accounts had been opened during the year, already surpassing the previous yearly record accounts figure of 57, 285 in 2010. By end July 2010, the number of CDS accounts opened was 22, 318,” the report noted. It also stated that these new small scale inventors came to the market with high risk appetites favouring smaller cap and illiquid stocks to earn big bucks in a relatively short period of time. The report further pointed out that these new entrants to the market also started to follow the moves of high net worth investors, which it termed as ‘herd mentality’.

“There has been a preference to following the investments of certain high net worth individuals, which has resulted in erratic share price movements. The consequent impact has been reflected in the movement of the more liquid MPI, which has stronger weighting towards larger cap stock, and was surpassed by the ASPI for the first time since its creation in 1998 (December 31), in January 2011, and continues to remain below the broader market index”.

Analyzing the other factors that have resulted in the dull situation prevailing in the market presently, the report noted that the U-turn by the broker credit stance by the regulator to prevent a possible market crash also played a major role in it.

Although the regulator somewhat relaxed its stance on brokers providing credit to clients lately, they are still expected to maintain leverage at zero levels while the SEC directive to clear debtors by December 2010 also remains unchanged.

The report also pointed out at the unprecedented number of IPOs and rights issues that came in to capitalize on the post-war scenario, which drained liquidity from the market exceeding Rs.30 billion year to date.

“Despite restrictions on bank guarantees for IPOs and guidelines on IPO allotment, the SEC and CSE have looked to increase market breadth and capitalization through new listings, which has potentially impacted market growth in 2011 year to date,” it stated.

As the report stated, the concerns that whether the market is effectively regulated has also contributed it losing steam in the present context.

Over the past few months, there has been increasing debate locally on whether the market is over regulated as in the recent times SEC came up with a number of directives and regulations such as price bands, directives limiting broker credit facilities, IPO share allotments and lock in period for investors who participated in private placement deals.

“Despite these new directives, the market remains volatile, with low-cap and illiquid stocks having ‘runs’ over a short period of time and investors/brokers appearing to side-step the regulations”.

Meanwhile, the report also cited the lack of foreign participation, which has always been a bone of contention in the Colombo bourse as a key reason for the market to lag. As the report pointed out, foreigners booked profits in the aftermath of the war victory against the LTTE and became net sellers in the market. As a result, the net foreign outflow since 2009 has been Rs.37.8 billion.

However as the report outlined, despite improving valuations following the recent decline in the market, coupled with robust earnings growth, foreign investors are likely to heave been hampered by a volatile global economic environment.

Another reason that has stalled the growth of the market according to the report was the decline in private sector institutional participation, notwithstanding government funds becoming very active in the bourse.

“This is likely on account of many funds an investment trusts already being fully invested in the market and new funds slow to trickle in” the report noted. Amidst all these factors, the Initial Public Offerings (IPOs) that came into the market also lost steam, the report pointed out.

“Until recently, there have been heavy investments in IPOs as newly listed companies usually had a market run in the first few days of listing, and smaller investors would cash out during this period with a tidy gain.

However with the market rising sharply, the discount to investors gradually reduced, while limited on bank guarantees combined with allotment guidelines, resulted in a drop in subscription,” the report said. Since 2010, there have been 20 IPOs, raising approximately Rs.16.4 billion. In 2010, there were 11 IPOs, raising Rs.5.3 billion while in 2011 year to date there have been 9 IPOs raising Rs.11 billion.

source - www.dailymirror.lk