June 27, 2011 (LBO) - Sri Lanka's capital markets regulator has reduced systemic risk by imposing restrictions on lending to buy stocks that had helped fuel a market rally, a brokerage said.
The curbs on lending were partly responsible for the market to fall from record highs in recent weeks, TKS Securities said in a research report.
"We believe curtailed retail activity (in contrast to the pre-2011 era of uncollateralized debt trading), profit taking by foreign portfolio investors and rather cautious approach by the local institutions are the main reasons for the recent lack-lustre performance.
"However, it is noteworthy that regulator directions have reduced systematic risk (by requiring all brokering houses to clear its uncovered debt by December 31, 2011 and ensuring only licensed margin providers would provide financing for share transactions) though capping retail buoyancy in the short run."
The Securities and Exchange Commission, the market regulator, imposed curbs on broker credit to clients amid fears of a stock market bubble with brokers being given time till the year-end to clear credit accounts.
TKS Securities said foreign portfolio investors who entered the market during the past 36 months (or earlier) were seen booking their profits "with all rationality" despite the strong positive outlook.
The market rally kick-started following the end of the island's 30-year war in 2009 was subdued within one and a half years making the broader market to gain only 6.1 percent in 2011 so far against the 37.6 percent gain in the corresponding period of the previous year.
"Hitherto the ability for the market to sustain and absorb the foreign selling justifies our projection of a much buoyant market when both foreign portfolio investors and local institutional investors become bullish in the future," the report said.
Sri Lanka’s macro outlook remains positive and company profits, based on a sample of 226 firms out of 255 listed in the Colombo bourse, have soared 120 percent to 137.7 billion rupees in the 2011 financial year from a year ago.
The report said corporate profits have increased 67 percent to 37.3 billion rupees in the fourth quarter of the 2011 financial year from a year ago.
In comparison, in 2010 the corporate earnings increased two folds to 22.4 billion rupees.
The banking, finance and insurance sector contributed about 27 percent to overall corporate profits while conglomerates contributed 22 percent.
The highest net profit growth rates came from the hotel, motors and power sectors, the report said.
source - www.lbo.lk
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