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.
"This information has been compiled from sources that we believe to
be reliable but we do nothold ourselves responsible for its completeness
or accuracy. No matter published herein create any liability of any kind
of HNB Stockbrokers (Private) Limited or its associates. All opinions
views findings and conclusions included in this report constitute our
judgment of this date and are subject to change without notice.
HNB Stockbrokers (Private) Limited has the sole copyright for this
report and the informationand views contained cannot be reproduced or
quoted in part or whole in any form whatsoeverwithout the written
permission from HNB Stockbrokers (Private) Limited. If anyone does such
reproduction or quotation that person will be violating our legal rights
and liable for the legal consequences therefore." |