Market recovers from an unwarranted panic selling

INDICES took a roller coaster ride in a holiday-depleted market amid mixed developments in the macro environment. The market started off on sour note this week amid escalating violence in the North and East, with indices falling by more than 100 points on Tuesday.

While a similar trend was witnessed at the start of trade on Wednesday, by the latter part of the day bargain hunters entered the market, offering resistance to the declining indices. The market managed to rebound on Thursday, with the positive momentum continuing through to Friday.

The ASPI (All Share Price Index) closed the week at 1922.2 points, down by 111.1 points or 5.46% compared to last week, while the MPI (Milanka Price Index) closed the week at 2451.1 points dropping by 7.61% or 201.8 points compared to last week's closing levels.

Dialog continued to be the highest traded stock for yet another week, with 16.6 million shares trading. The major part of 10.6 million shares traded on Thursday amid a high level of foreign participation. Week on Week (WoW) price slipped 1.5%, to close at Rs.16.50 per share.

The stock traded in the range of Rs.15 and Rs.16.75 per share this week, while becoming the highest contributor towards turnover, contributing Rs.264 million.

Foreign participation was also witnessed in JKH shares, which saw 0.78 million shares trading for the week. The share price fell by a notable 10.6% WoW to close at Rs.129.25 per share, trading at high of Rs.143 and a low of Rs.120 per share during the week.

The counter was the second highest contributor towards weekly turnover contributing Rs.99 million. Among other counters, which witnessed notable reductions in share price, this week was SLT, Lanka IOC and Distilleries.

SLT share price fell by 10.8% WoW, closing on Friday at Rs.16.50 per share. Approximately 2.6 million of SLT shares traded for the week. The counter traded within the range of Rs.18.50 and Rs.15.75 per share contributing Rs.44 million towards turnover for the week.

LIOC saw its share price plunge by 9.6% this week compared to last week's closing price of Rs. 36.50 per share.

The counter closed the week at Rs.33 per share, trading at a high of Rs.35.50 and a low of Rs.30 per share. LIOC contributed Rs.41 million towards total turnover for the week with 1.3 million shares trading.

Distilleries share price slipped by 7.9% WoW to close at Rs.35 per share for the week.

Approximately 1.7 million of Distilleries counters traded for the week, contributing Rs.58.4 million towards weekly turnover. The share prices of the counter fluctuated within the range of Rs.37.75 and Rs.31 per share for the week.

Total turnover for the week amounted to Rs.959.9 million, with the week consisting of only four working days. Average daily turnover showed a notable improvement of 23.7% to stand at Rs.239.98 million. Foreign investors remained net buyers for the week amounting to Rs.45.4 million.

Foreign purchases for the week stood at Rs. 330.3 million, while foreign sales stood at Rs.284.9 million. Foreign activity remained highest on Thursday amid the trade of notable quantities of Dialog shares.

Foreign participation for the week stood at 31.2% of total activity. The highest traded stock for the week in terms of turnover was Dialog, Tess Agro, Sierra, Royal Ceramics and Ceylon Glass.

Macro uncertainty offers opportunities for bargain hunting

Market continued to react in the wake of the increasing violence in the North East as both indices lost ground during the early part of the week. Some of the lost points were recovered during the last two days of trading but the ASPI closed 5.5% down compared to the previous week.

The Sri Lankan economy accelerated its growth in real terms to 6.4%in the third quarter of 2005, compared to the growth of 5.5% during the corresponding quarter of 2004.

The cumulative economic growth in the first three quarters of the year was 5.5% in 2005, as against 5.8% in the corresponding period of 2004. Telecommunication sub sector continued to provide steady platform for growth expanding by a further 26.2% in the third quarter.

The Tsunami affected sub-sectors, fishing and hotels and restaurants, were still in the process of recovering, while the construction sector has had an added impetus following the tsunami.

We believe that the strong growth in the economy would ease some pressure from the investors who have been highly sensitive to the escalating violence in the North East.

Panic selling - unwarranted Last Tuesdays panic selling was a clear over reaction, as witnessed by the immediate recovery over the next two days. Most of the fundamentally sound counters returned to attractive price levels and we believe that they still offer relative value.

Particularly, telecom stocks Dialog and SLT have fallen to levels below our target prices, thus we advise careful accumulation. Furthermore JKH, LIOC, Distilleries, Commercial Bank, HNB, Seylan all have returned to prices that prevailed during early part of 2005.

Given the steady earnings growth forecasts in these stocks, we believe that the investors should look for bargain hunting opportunities more seriously. Look for accumulation However we insist not to chase behind the stocks too aggressively, as the possible volatility in the indices amid the continuing macro uncertainty would continue to enable accumulation.

Meanwhile, the market is likely to be sensitive to the developments in the macro front. We reiterate our view that the longer term economic and market fundamentals rely on the peace premise but do not acknowledge the panic selling after every single incident in the North East.

While such incidents may offer some hint on the longer-term peace direction, it is unnecessary to aggressively react after each and every violent incident. Thus we strongly advise the investors not to engage in panic selling but instead look for trading opportunities when the fundamentally sound counters reach attractive price levels.