Investors forced into a shell amid political uncertainty

POLITICAL uncertainty dampened yet another week of trading at the Colombo Bourse, even though the indices showed an upward trend.

The ASPI (All share Price Index) closed the week at 1878.6 points up 1.59% or 29.4 points compared to last weeks closing. While the MPI (Milanka Price Index) showed a similar trend closing on Friday at 2627.3 points showing an increase of 59.4 points or 2.31% compared to last week's closing level.

Tess Agro, was the highest traded stock with around 5.3 million of its shares trading for the week. It's share price was down by 14.3% to close the week at Rs.1.50 per share.

SLT saw 3.5 million of its shares trading, with the major part of 2.4 million shares trading on Friday alone. The share traded at a high of Rs.20.75 and a low of Rs.18.75 to close the week at Rs.20.50 per share.

The total turnover remained low at around half the total turnover of last week. Turnover for the week stood at Rs.650 million showing a dip of 45.8%, compared to last week's turnover level of Rs.1.2 billion. The average daily turnover for the week stood at a disappointing Rs.129.5 million.

The major contributor towards weekly turnover was Aitken and Spence, contributing Rs.79.3 million. With approximately 203,000 shares trading at a high of Rs.394.75 and a low of Rs.389 per share for the week. The counter closed the week at Rs.389.25 per share.

Lambreta (Kotmale Holdings Ltd.) was the top gainer for the week with its share price appreciating by 46.4% to close the week at Rs.20.50 per share.

The share appreciation came amid the announcement of a private placement, which would see 12.56 million of new shares being issued.

However volumes traded for the week were low at a mere 1,400 shares. The week saw foreign investors remaining net sellers standing at Rs.20.8 million. While both foreign purchases and foreign sales saw notable declines for the week.

Foreign purchases for the week stood at Rs.50 million, showing a 56.4% decline, while foreign sales stood at Rs.70.8 million showing a 39.8% decline compared last week. Foreign participation for the week was 9.3% of total activity.

Tess Agro, Asiri Medical, SLT, Nawaloka and Royal Ceramics remained the highest traded stock for the week.

Point of View

Minority Government possesses the capability of continuing

Janatha Vimukthi Peramuna (JVP), one of government's key alliance partners, stepped out of government last week sighting opposition to possible signing of the Post Tsunami Operations Management Structure (P-TOMS).

As a result the government lost the majority in the parliament and ended up with 79 seats, while the opposition is now commanding a massive 146 seats in the 225-seat parliament. However government coalition still remains the single largest in the parliament ahead of the United National Front (UNF), which commands 68 seats.

Thus we believe that, despite being weakened, the government would continue as it is while securing support from different opposition parties on a case-by-case basis.

In theory, for any issues relating to the progress of the peace process UNF and the Tamil National Alliance (TNA) are likely to support the government while restructuring of state institutions may be backed by the UNF.

On the other hand JVP could support other development work, specially in the areas listed in their policy document. (Rata Perata) Even though gathering the support of the opposition may not be an easy task in practice, we believe that a minority government possesses the capability of continuing for a reasonable time frame backed by the support of the Executive President.

Snap polls not a solution

While neither the investor community nor the capital markets prefer a minority government, we strongly believe that this is a far better option than going for a snap poll at this stage.

Thus it is important that the two main political parties come to some understanding on the key national issues and place priority on national matter above the party politics.

If the government and the LTTE sign the P-TOMS within the next few weeks, we feel that it could give an immediate boost to the investor confidence, but the sustainability of the same would largely depend on the practical implementation of such mechanism.

In our opinion signing is just the initial phrase of the overall process, as we expect more tug a wars to appear during the implementation stage.

Policy rates revised upwards

As expected the Monetary Board has decided to increase the Repurchase (Repo) rate and the Reverse Repurchase (Reverse Repo) rate by 50 basis points to 8.25% and 9.75%, respectively. The monetary policy tightening taken place thus far has helped to contain the monetary expansion to a certain extent.

Excess liquidity in the money market had declined to a zero level by end May 2005 as a result of the outright sales of Treasury bills by the Central Bank and the non-renewal of a part of the maturing Treasury bills held by the Central Bank.

Since 01 April 2005, the Central Bank has conducted ten auctions to mop up excess liquidity on a permanent basis, and sold Treasury bills amounting to Rs.18.8 billion from its holdings. Market interest rates have adjusted upwards following the increase in policy interest rates in May 2005.

As a result of the Central Bank policy actions, reserve money growth has slowed from about 20% in December 2004 to around 17% in May 2005. However, the continued expansion of monetary aggregates remains an area of concern.

Broad money continues to grow at around 20%, mainly due to an increase in credit to the public sector and the private sector, which increases the demand pressure on inflation warranting further tightening of the monetary policy. Thus we believe that further tightening of the monetary policy may be required to control the inflation.

Signing P-TOMS could strengthen the rupee

The expectation of a flow of foreign exchange is likely to strengthen the Rupee marginally (or hold at Rs.100 levels) in the event of signing the P-TOMS.

Furthermore Central Bank will be in a better position to increase the interest rates to curb the growing inflationary conditions, with minimum damage to the economic growth. We believe that the credit growth could be controlled through a further rate hike, if foreign aid would flow in for development activity.

No requisite for panic selling

Market is likely to remain volatile amid the uncertainty with reduced activity levels. Investors may wish to take a wait and see approach as the macro direction still remain uncertain.

We advice the investors not to engage in panic selling, without a proper analysis on the longer-term fundamentals of the market.

Our primary argument is that the longer-term growth prospects are closely pegged to the peace process, and as long as peace remains in tact, the investor community has little to panic. Therefore we advice the investors to carefully monitor the macro developments and look of opportunities for bargain hunting in the event of retail panic selling.

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