Market in mayhem

Loss of value tops Rs. 317 billion between boom and bust; Rs. 121 billion in past six days; from 2011 peak, ASI down 17.6% and MPI by 19.5% Brokers in emergency meeting; agree to request SEC to do away with rigid credit rules to avoid excessive forced selling; Seek greater but conditional credit freedom based on net capital Central Bank Financial Sector Stability Consultative Committee meeting takes up Bourse’s free fall

The free fall is causing mayhem in the Colombo stock market, until recently the world’s most consistent best performer, with brokers meeting at emergency session yesterday to find means to ensure stability.

At yesterday’s meeting there had been consensus to request the Securities and Exchange Commission (SEC) to do away with the strict rules on forced selling if T+3 rule for settlement is not met.

Spate of forced selling is attributed as one of the key reasons for the sharp downfall of the market.

Broking sources said that given the current rules and market conditions, every day a significant degree of forced selling takes place whilst with the free fall; there are increased margin calls by margin providers.  The SEC brought in stricter settlement rules (T+3 after which giving broker discretion but forced selling after T+5) to address what it alleged as looming credit bubble, which threatened to burst mid last year. Previously brokers could give credit to the tune of 10 times their net capital. What is likely to be suggested is SEC allowing carrying of debtors beyond T+3 subject to less stringent conditions.

The basis for this position is that with much discipline achieved as opposed to the highly volatile situation mid last year along with other safeguards in place, SEC could create extra room for greater credit for investors.

On most counts even during the dizzy-days broker credit exposure on average had been 3 times their net capital. Analysts said banks are allowed to lend 10 times their net capital and finance companies 7 times but brokers aren’t given much leeway.

The state of the market also came up for discussion at the meeting of the Central Bank’s Financial Sector Stability Consultative Committee yesterday.  Senior officials of the Colombo Stock Exchange and SEC had participated. Some said that the idea conveyed was that the market was correcting itself from dizzy heights hence it should be allowed to take its own course. Some didn’t agree but felt there were certain fundamental flaws in the market partly due to some select overregulation such as too restrictive credit rules.

Debate as well as emergency meetings comes as the loss in value of the Colombo stock market between its mid-February peak and yesterday topping the Rs. 300 billion mark to languish at Rs. 317 billion. Of this the last six days the loss was a staggering Rs. 121 billion.

Market capitalisation yesterday stood at Rs. 2,283 billion, as against 14 February peak of Rs. 2,600 billion. As at 31 December, 2010’s figure of Rs. 2,210 billion, yesterday’s value reflects a mere 3.3% increase.

Yesterday market began from where it finished on Friday — losing streak. The ASI dipped by 1.57% and MPI more sharply by 2.24% bringing the year to date negative return to 3.04% and 16.52% respectively.

Last week ASI dipped by 3.54% and MPI by 4.5%. Since their 2011 peaks, ASI has dipped by 1,378 points or 17.6% and MPI by 1,432 points or 19.5%.

Loss in market capitalisation last week was Rs. 85 billion and with yesterday’s loss of Rs. 36 billion the six day consecutive loss was Rs. 121 billion.

Analysts said that so far this year macro-economic fundamentals haven’t worsened but improved. This together with higher earnings forecast and a record 8.5% GDP growth estimate made the external outlook very positive. However the investor sentiment and the market have worsened instead of gaining momentum.

Whilst all agree that dizzy returns of 125% (in 2009) and 96% (in 2010) are unlikely the current free fall despite positive external factors has caused serious concern. Most attribute it to overregulation with regard to credit rules, lack of liquidity as well as very low institutional investor participation both local and foreign.

Arrenga Capital described the fall as “drastic” taking the more liquid MPI to drop below 6,000 mark closing at 5,894.57 points. The month-end selling pressure dragged down the indices with nearly 37 counters registering a 52-week low in terms of price, it added.

Lanka Securities said all sectors except for Chemicals and Pharmaceuticals recorded losses during trading.
Out of 224 companies traded yesterday only 15% or 37 companies gained and that too mostly in an insignificant manner. All fundamentally sound stocks continued to get a beating.

“Institutional and high net worth investor participation was evident during the day despite counters extending last week’s losses,’ noted Asia Wealth Management.

NDB said Banks, Finance & Insurance sector was the main contributor to the market turnover (due to DFCC Bank and Central Finance), while the sector index decreased by 2.08%. The share price of DFCC Bank decreased by Rs. 2.50 (1.92%) and closed at Rs. 127. Diversified sector also contributed significantly to the market turnover (due to John Keells Holdings). The sector index decreased 1.23%. John Keells Holdings was the main contributor to the market turnover. Selling pressure on John Keells Holdings continued weighing heavily on the indices. The share price closed at Rs. 189.10 having decreased Rs. 5.70 (2.93%). Selling pressure was mainly witnessed in Vallibel One, Central Finance and Distilleries.

Asia Wealth said diversified John Keells Holdings emerged as the top contributor for the day with a contribution of 7% on the back of institutional and foreign investor sentiments. Renewed interest was evident in DFCC Bank on the support of institutional and high net worth participation as the market witnessed a volume of 440 k change hands at a price of Rs. 130.

Furthermore investor eyeing on Vallibel One continued despite the counter witnessing a price dip of 4.0% to close at Rs. 28.60 shouldered by high net worth interest. Similar concern was however evident in Central Finance, whilst Distilleries Company of Sri Lanka encountered 300 k shares crossing off at Rs. 176.00.

source - www.ft.lk