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The indices continued to reach new records as both indices recorded heavy gains during last week. ASPI touched a four-year high of 776.5 points, while the more sensitive Milanka index reached an all-time high of 1359.8 points.

The rally was centred around positive news from the political arena as the retail investors dominated the weekly turnover of Rs.627.62 million. Considering the low weekly foreign purchases of Rs.19.8 million, an average daily turnover of Rs.125.52 million was highly encouraging.

On Friday the ASPI closed at 771.99 points while the Milanka Price Index closed at 1350.29 points, both up by 2.64% and 1.75% respectively, when compared with last Friday's close.

The week started with a decline in both indices and activity level, mainly due to the President's comments against the 19th amendment and the lifting of the LTTE ban.

By Wednesday market sentiment turned bullish with the market picking up 16 points each on Wednesday and Thursday. On Friday the market dropped by 4.52 points as the profit taking was inevitable.

The retail participation continued as the prices marginally declined towards the end of the day's trading. JKH, NDB, Trans Asia and last Friday's giant killer Central Finance were the main contributors to the turnover. Some illiquid stocks such as Kelani Tyres, Hunters were also heavily traded during the week.

According to the Central Bank of Sri Lanka the economy reported a moderate 1.0 - 1.5% growth in Gross Domestic Production (GDP) for the 2nd quarter of year 2002 while the first quarter (Jan - March 2002) reported a growth of 0.1%. However, improvements seen in the political and economic fronts have led us to forecast a GDP growth of 2.0% for the year 2002.

With the major industrial countries yet to witness a full recovery from last year we remain pessimistic on the prospects for a major increase in export income in year 2002.

However, the second quarter of the year has seen a turnaround in export earnings compared with the same period last year. Adding to this factor, savings on military hardware. Meanwhile, the expected earnings of Rs. 21.0 billion as privatisation proceeds coupled with expected loan proceeds put our forecasts in line with the official forecast of deficit at 8.5% of GDP compared with a deficit of 10.9% of GDP in year 2001.

We expect interest rates to remain at current levels during the second half of year 2002 owing to lower borrowings by the Government from the domestic market. We forecast 1-year Treasury bill rates to remain around 10%- 11% during the second half of the year.

The Colombo Consumer Price Index (CCPI) declined to 10.1% in August from 10.8% recorded in July 2002 while the year-to-date figure at 11% still remains somewhat high. However, the current low interest regime should keep inflation pressure in control and we expect the annual inflation rates to decline around 9.5% - 10.0%.

The IMF on Tuesday approved the US $ 64.0 million final tranche of the stand by facility, completing the US $ 266.0 approved in April 2001. This would raise gross reserves to Rs. 2400.0 million from current Rs. 1500.0 million which would be sufficient to finance 4.8 months of imports.

Minister of Defence on Wednesday night lifted the ban on the LTTE and took another step towards the peace talks to be held in mid September. The Market reacted to the move as the retail investors poured in funds to the market. Thursday's climb was mainly due move by the Defence Minister.

Different political parties had various opinions and some argued the validity of the Defence Minister's act. The market was sliding around the news, as the peace process is a key factor of influence for the Colombo stock market.

While the friction between the Government and the President seems to be fading away our outlook remains one of vigilant and confident expectation of the market improving in the short-term. We however must elucidate that this hypothesis is preclusive of any sudden breakdown in the peace process. The market has risen 100 points or 15% since the official dates for peace talks were announced in mid August. The market is eagerly watching the progress of the peace talks between the two parties and the next major move is likely to come after the peace talks. Although it is premature to predict the progress of the peace talks all indications are that both parties will not go back to armed confrontation.

In our view the direct talks expected between the two parties would be the beginning of negotiations for a peaceful settlement rather than realisation of permanent peace. The renewed interest shown by foreign investors in the recent past is an indication of their confidence in the peace process and the identification of potential growth of the local bourse. Low interest rates, expected economic reforms,the privatisation process and stable rupee would undoubtedly contribute to an economic boom in the coming years.

With the situation in the North-East taking a turn for the better and a period of relative peace and tranquillity prevailing and the economy steaming, the market is likely to see the investors taking a bottom-up approach and picking up selected stocks which would eventually lead the market indices testing record highs in the latter part of the year running into the 1st quarter of 2003.

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