CalPERS inclusion boosts market

The market remained upbeat on the back of reports that CalPERS (California Public Employees' Retirement System) a US based pension fund including Sri Lanka into its permissible investment list.

The ASPI peaked on Wednesday breaking the psychological barrier of 1,800-points. On Thursday the ASPI closed at 1802.1 points, up by 22.4 points or 1.26%. The MPI showed a similar trend rising throughout the week to close on Friday at 2511.2 points. The index was up 73.1 points or 3% compared to the previous week's closing levels.

Renewed interest was seen in blue chip stocks such as LIOC, JKH and AHOT properties. Interest on JKH and LIOC were fueled by expectations that CalPERS would most likely invest in fundamentally strong stocks. Approximately 1.37 million LIOC shares traded, contributing 67.1 million towards weekly turnover. JKH saw around 1 million of its shares trading, while the share appreciated by around 3%, contributing Rs.152 million towards the weekly turnover.

AHOT properties saw 6.47 million of its shares exchanging hands, becoming the highest contributor towards weekly turnover. The stock contributed approximately 227.8 million towards turnover. A total of 5.83 million shares traded on Wednesday alone at a high of Rs.37.50 and a low of Rs.35.00 per share.

Total turnover for the week stood at Rs.1.88 billion, with a daily average of Rs.470.9 million. The four-day week showed a substantial 54% increase in average turnover, week on week.

Amongst the top gainers for the week was Bogala Graphite which saw its share price appreciate by 12%. This was a modest increase compared to last week, which saw the prices rising by 70.7%. The counter closed at Rs.73 per share, with approximately 1.2 million shares trading. Bogala Graphite contributed Rs.83 million.

Foreign investors remained net sellers amounting to Rs.136.5 million. Foreign purchases stood at Rs.333.7 million, while foreign sales totalled to Rs.470.2 million. The foreign participation 21.3%, showing a reduction compared to the previous week's participation level of 37.5%.

TessAgro, AHOT Properties, Seylan Merchant, Royal Ceramics and Ceylon Glass were amongst the most traded stocks.

Investors overreact to CalPERS news

As expected by us, the market remained volatile, while the overall trend continued to move in the positive direction backed by the announcement that Sri Lanka has been included in the CalPERS's permissible investment list. We feel that the investors over reacted on Tuesday to such news, as the Milanka Index jumped nearly 65 points within a short period of trading. However indices soon went through a correction, as some investors started to book profits.

We expect indices to continue its positive momentum, with investors expected to remain bullish after the inclusion in the CalPERS's permissible list. Furthermore retail investors are likely to return to the market after the holiday season, which should boost the activity levels further.

While foreseeing the positive momentum continuing in the coming weeks, we expect the indices to fluctuate in a wide range as a result of sporadic pockets of profit taking.

Good times ahead for Blue Chips?

Sri Lanka was among the four new inclusions to the annual list of emerging markets in which the CalPERS can invest. The other new entrants include Argentina, Thailand and Turkey, who together with Sri Lanka now enter the list of 19 emerging markets, which meets a rating of 2.00 or more (CalPERS Score) for 2005.

CalPERS Investments is USA's largest public pension fund and the third largest in the world, with assets totalling $184.6 billion at February 28, 2005, CalPERS investments span domestic and international markets. Investments in international public equities are managed both actively and passively through the use of external managers. Slightly less than 20 percent of the investments are held in non-U.S. public equities. CalPERS, which manages pensions on behalf on 1.4 million state employees and their families, has investments worth $3.9 billion in emerging markets.

CalPERS use seven broad categories of factors (macro-factors) when evaluating an equity market. Subsequently points are allocated to each market for these factors and the final rating is based on a pre-determined weighting.

Sri Lanka scored most points (3 points) for Market Liquidity and Volatility, but was rated low (1 point) in Settlement Proficiency / Transaction Costs. It is evident that Sri Lankan transaction costs are still among the high end, thus acting as one of the key barriers to attract foreign investments.

Lack of liquidity, poor free float market capitalisation, currency risk, political uncertainty, limited corporate governance are among the other issues that prevent a steady flow of foreign investments to the country.

However it should be clearly noted that most of these factors have shown considerable improvement over the last few years, with further potential for development. Therefore we believe that the authorities should take urgent measures to upgrade these areas and sustain the momentum to achieve better heights.

CalPERS, a long-term investor

First and foremost we highlight the fact that inclusion on the list of permissible countries does not compel CalPERS actually to commit assets to that country's equity market, thus the actual flow of investments would solely depend on economical attractiveness. CalPERS's "Statement Of Investment Policy" suggests that its Target Level Risk is to avoid the decline in net asset value shall not exceed 10%, in any one month.

Furthermore, the return target shall be the return of the one-year U.S. Treasury Bill rate plus 5% over a full market cycle (three to five years) Bulk of the funds are subjected to an initial lock-up of 1-year and quarterly liquidity is reviewed thereafter.

This indicates that CalPERS is a long-term investor, which most probably follow the fundamentally sound counters.

While the macro and the market factors are likely to make a significant impact on the investment decision, we still believe that many counters listed in the Colombo bourse offers growth potential and value, backed by sound earnings growth and a reasonable dividend yield.

Considering CalPERS investments policies and the historical background we believe that following stocks are likely to capture the eyes of the Fund. (Refer Figure 2) However, the liquidity constraints in some of these counters and above mentioned issues could become a clear barrier when selecting the stocks.