Investors turn bullish in aftermath of Dialog IPO

Both the ASPI and the MPI peaked to new highs, as the market picked up during the latter part of the week. The ASPI (All Share Price index) closed the week at a high of 1952.3 points, up by 2.55% or 52 points compared to last week. Meanwhile, more sensitive MPI (Milanka Price Index) rose to 2767.6 points, showing a sizable 86.9 point increase or 2.96% rise compared to last week's closing level.

The Dialog IPO was the talk of the week with the issue expected to be, oversubscribed by over six times. It was reported that foreign investors dominated the IPO, handing in applications to the value of over $350 million. The total number of applications is well set to rise beyond 50,000. Interest created on Dialog seemed to sweep across the telecommunications sector, with investors rallying around SLT counters for yet another week running. SLT retained its slot as the highest traded stock for the week, with around 9 million of SLT shares trading for the week.

The share price of SLT rose by 10.2% closing the week at Rs. 24.25, while the counter traded at a high of Rs. 24.75 and a low of Rs. 21.25 per share for the week.

The sale of a 35% stake in Ceylon Hotels Co. Ltd. (CHCL) was one of the main driving forces behind the rise in indices on Friday. The 35% or 1.07 million, share stake of CHCL held by Bank of Ceylon was sold off reportedly to Sanjeev Gardiner at a price of Rs. 610.75 per share.

Ceylon Hotels Ltd. currently owns 21 Rest Houses and snack outlets across the island, while it also holds a controlling stake of 76.54% in Kandy Hotels Co. Ltd. (Queens Hotel and Hotel Suisse).

With the announcement of the sale of CHCL shares, the share price shot up by 150% to Rs. 300 per share on Tuesday. The counter was seen trading at a high of Rs. 700 and a low of Rs. 120 per share for the week, to close the week at Rs. 568.25 per share, showing a staggering 354.6% appreciation Week on Week. CHCL shares contributed a substantial Rs. 672.1 million towards weekly turnover, making it the highest contributor, with 1.1 million of its shares traded during the week.

The total turnover for the week showed a substantial 56.25% increase to stand at Rs. 2.25 billion, compared to Rs. 1.44 billion seen last week. The average daily turnover for the week stood at Rs. 450.7 million. This weeks turnover was supported by Friday's contribution of Rs.1.01 billion mainly due to the above said sale of CHCL shares. Foreign purchases for the week stood at Rs. 409.9 million, showing a notable dip of 41.6% Week.

While, foreign sales for the week remained high at Rs. 502.5 million, showing a thumping 197.7% increase Week on Week. The main contribution towards both foreign sales and purchases came on Monday with a foreign to foreign transaction going through. The resultant net foreign outflow for the week was Rs. 92.6 million. Foreign participation for the week stood at 20.2% of total activity.

The most heavily traded stock for the week was SLT followed by Blue Diamonds, Asia Capital, Lanka IOC and Royal Ceramics.

Market resilient amid increased foreign interest

The Dialog IPO was more than 6 times over subscribed drawing approximately Rs. 50 billion (US$500 million) worth of applications. An overwhelming response was seen from the foreign investors, as the foreign component (40% of the issue or US$34 million) was over subscribed nearly 11 times. Some of these overseas investors were first timers to Sri Lanka, thus showing the appetite for a fundamentally sound counter despite the prevailing political uncertainty.

The increased foreign participation in the IPO, boosted the local investor confidence and the market turned bullish towards the latter part of the week. We believe that the positive response to the IPO is a real confidence booster; given the macro uncertainty expected to continue in the short term.

London blast; No reaction from the local investors

Market did not react to the suspected terrorist attacks in London, as Friday's trading remained bullish. We believe that such attacks would have little impact towards the local economy, as the terror has been so far limited to a few incidents. Given that no other major attacks take place we are of the opinion that the local market has no reasons to engage in panic selling.

On the other hand, these attacks could add further pressure on global terrorism, thus distancing the possibility of any disturbances to the Cease Fire Agreement (CFA). It is our belief that the international community would take a more closer look at the Sri Lanka's CFA in the aftermath of the latest terrorist attacks, thus chances of getting back to war becomes further remote. We continue to place our optimism on upholding the peace agreement and reiterate a 73% probability on the continuity of the no war situation (Refer Strategy Report - "Reaching Beyond the Waves" - published in Feb 2005)

In our view it is unlikely that the parliament would be dissolved at this stage and believe that the present minority government could continue in office in the medium term supported by the Executive President. Considering the recent voting patterns it is likely that the future governments would struggle to win an over 50% majority in the parliament, thus leading to the establishment of coalitions. We feel that the investor community should now get use to such situations and be more focused on the commitment of different political parties towards the sustainable long term peace.

Oil prices rise to record levels

The global oil prices touched a new high of US$61.28 on Thursday amid fears of supply disruptions. (See oil update elsewhere) Bloomberg quoted Sri Lanka's Energy and Power Minister Susil Premajayantha saying, "`We have no plans to raise fuel prices at the moment. We bought the consignments coming in now a few months ago so there's no need to raise prices but we are watching the situation.''

Our estimates indicate that the local petrol, diesel and kerosene prices should be approximately at Rs. 85.05, Rs. 71.75 and Rs. 65.41 respectively, considering the prevailing global oil prices. Thus we believe that another sizeable fuel price hike is inevitable over the next two months, if the global prices do not fall to at least US$55 per barrel.

Any increases in domestic fuel prices are likely to add further pressure on the already escalating inflationary conditions.

Mixed sentiment to continue

In the Friday's hype, the market capitalisation crossed Rs. 500 billion (US$5 billion) a feet that was not achieved before. Once Dialog is listed we expect this figure to increase by at least Rs. 100 billion (US$ 1 billion), showing clear signs of an enhanced market size.

We expect the overall market sentiment to remain mixed with indices sensitive to the political developments. Both indices are likely to stay volatile with mixed investor reactions due to profit taking and bargain hunting.

Hurricane Hysteria drives up oil market

Oil prices rose to a new high of $61.28 per barrel amid fears of supply disruptions as a depression in the Caribbean was turned to a tropical storm this week. The storm, which has been named hurricane Dennice is the second storm to hit within a week, with tropical storm Cindy disrupting oil supplies earlier this week.

Nearly 200,000 oil barrels per day is expected to be shut in, as hurricane warnings led to 85 production platforms and 11 drilling rigs being evacuated. While the hurricane is not expected to be as severe as hurricane Ivan, which hit in September of last year, oil prices rose amid investors panicking and expecting a possible supply shortage with excess supply being thin.

The latest U.S oil inventory snap shot showed a sharp dip in crude stock piles, falling by 3.6 million barrels to 324.9 million barrels, however managing to remain 7% above year ago levels. Gasoline inventories also saw a dip of 900,000 barrels to stand at 215.3 million barrels. While US oil inventories have dropped, they still remain comfortably above last years levels, thus we believe panicking on an imminent supply shortage is at this point of time uncalled-for.

We expect oil prices would ease after the hurricane passes over, and stabilize again during the latter part of the next week.

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