Market covered with cloud of uncertainty

The market, which managed to hold ground for the first half of the week fell notably on Thursday amid growing tension in the Eastern part of the country. Friday saw both indices improving marginally, after an early fall. The ASPI (All Share Price Index) closed at 1929.1 points, down 23.2 points or 1.2% compared to last week. The MPI (Milanka Price Index) closed at 2701.7 points, down by 65.9 points or 2.4% compared to last week's closing level.

SLT managed to retain strong investor appetite for yet another week, as investor interest showed no sign of loosing momentum. A substantial 15.9 million of SLT counters traded for the week at a high of Rs. 25 and a low of Rs. 22.25 per share.

The share price saw a decline of 5.15% closing the week at Rs. 23 per share. The counter contributed Rs. 378 million towards turnover becoming highest contributor for the week. Health sectors counter Nawaloka was the second highest traded stock for the week with approximately seven million shares trading, contributing Rs. 28.1 million towards weekly turnover.

Among the top gainers for the week were plantations stocks; Namunukula , Agalawatte and Hapugastanne. Namunukula saw its prices rising by a sizable 30% to close the week t Rs. 19.50 per share, with 1.4 million of its shares trading for the week. Agalawatta counters meanwhile saw its share price rise by 23.6% to close the week at Rs. 17 per share. The counter saw 349,600 of its shares trade for the week. Hapugastanne saw a relatively mere 10,200 of its shares trading for the week, while the share price rose by 14% to close the week at Rs. 16.25 per share.

Weekly turnover remained relatively low at Rs. 1.28 billion, showing a substantial 43.6% reduction compared to last week's turnover of Rs. 2.25 billion. The resultant average daily turnover for the week stood at Rs. 255 million. Foreign investors remained net buyers for the week amounting to Rs. 118.6 million. This was mainly due to the purchase of 1.54 million of Kandy Hotels Ltd. counters reportedly by a Hong Kong based fund. The sale went through at a price of Rs. 57 per share, with the selling party is believed to be Mr. Nahil Wijesuriya.

Foreign purchases for the week stood at Rs. 242.3 million, with the major portion of 119.2 million coming in on Wednesday, amid the above said sale of Kandy Hotels shares. Week on Week however foreign purchases showed a 41% dip.

Meanwhile Foreign sales for the week stood at Rs. 123.7 million, also showing a notable dip of 75.4% Week on Week. Foreign participation for the week was quite low standing at a mere 14.3% of total activity. SLT, Nawaloka, Reefcomber, Kotmale Holdings and Royal Ceramics were among the highest traded stocks for the week.

Tensions in the East affect investor confidence

Tensions in the East reached a climax last week with the LTTE announcing that they would use armed escorts to travel through government-controlled territory. Earlier in the week they pulled out all political offices in the Eastern province citing insufficient security for their members. The violence in the province resulted in a series of shootings and killings that added undue pressure on the on going peace arrangements.

According to the media reports,the Supreme Court, on Friday, ruled that certain sections in the Post Tsunami Operations Management System (P-TOMS) violated the legislation, thus issued a stay order on four main issues, until further review on September 12, 2005. The fund management, location of Regional Committee in Kilinochchi, Project approval and implementation issues in Regional Committees are the issues being mentioned in the stay order.

Time to review the clauses However, the judgment did not consider the P-TOMS as null and void, thus we believe that these issues should now be further negotiated between and government and the LTTE.

In the aftermath of the judgment, the development activities looked get further delayed but some of the funds may well be used for the development activities of other parts of the country.

These developments have affected the investor confidence over the last few days, and is expected to disturb the investment while pushing the investors into a "Wait and see approach".

However, we believe that these tensions could well be tamed at the negotiation table as seen in the past.

Policy rates unchanged

The Monetary Board has decided to maintain the policy interest rates of the Central Bank at their current levels and to conduct open market operations aggressively to mop up excess liquidity from the market. Inflation has continued to moderate due to the improvements in supply conditions as well as the monetary policy actions taken so far. The point-to-point change in the Colombo Consumers' Price Index (CCPI) declined continuously from 15.9% in February 2005 to 9.4% by June 2005.

We expect the inflationary situation to remain flat over the next few months, as the inflation due to rising fuel costs is likely to be compensated by the mopping of excess liquidity in the market. Therefore we believe that the policy rates would stay in the range of 8% - 9% in the medium term.

High volatility to continue

As expected by us market remained volatile throughout the week and was sensitive towards the present political developments. We expect this pattern to continue in the coming weeks with large fluctuations in the indices creating trading opportunities. We continue to advise the investors not to engage in panic selling and look for opportunities for bargain hunting amid political uncertainty.

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