Stock market Index reaches record breaking milestone of 5,000 points

RECORD: In the history of the Sri Lankan Stock market, a stock market index has reached a record breaking milestone of 5000 points. The MBSL Midcap Index was the first to cross 1000 points in September 1999 and the Milanka Price Index reached 1000 points in December 2001.

On June 17, 2003, the MBSL Midcap Index was the first to move over double its base value, which was followed by the Milanka Price index on 23 June 2003.

Thereafter MBSL Midcap index reached continuous heights of 3,000 on 19 January 2005, and 4,000 on 08 March 2006 and reached record breaking 5000 on 24 January 2007.

The statistics in table indicate that the Midcap index increases by 500 points within shorter time interval in the recent past and is quite steady with reasonable time periods.

The index has moved from 3500 to 4,000 and from 4,000 points to 4,500 points within 7 month period which indicate that the Midcap index shows significant growth and the prices of the midcap stocks are increasing.

Measured over the first month of 2007, the correlation of the Midcap Index with the All Share Price Index (ASPI) is 0.97. Which means the Midcap Index is strongly related to the overall market.

This relatively high correlation makes the Midcap Index sensitive to market-wide movements. Over the same period, the correlation of MPI with ASPI is 0.99, which indicates high sensitivity to market wide movements.

The market risk of the Midcap Index was measured by its beta with respect to the ASPI .The beta of Midcap with respect to the ASPI is 0.53,which indicate Midcap portfolio is as half as risky as the overall market.

Whereas the beta of MPI with respect to the ASPI is 1.3,which indicate that the, Milanka Index, by its nature, is about 30% more risky than the overall market.

For the seven-year period from 2000 to 2006, on average, MidCAP has out performed both the ASPI and the MPI by generating an annual average rate of return of 27.5%.

During the period, MidCAP grew at a Compounded Annual Growth Rate (CAGR) of 24.9% while ASPI and MPI recorded a CAGR of 25.4% and 22.4%, respectively. CAGR reflects a compounded annual rate of return at which an initial investment grew over a period of time to reach a certain level of wealth.

The table below presents the comparative analysis of the performance of the three indices, movement of inflation and the one year risk free rate (Treasury bill rate). Index investing is a common strategy for passive investing approach in other countries.

The objective of an index investing is to track the returns of an index without much deviation from the major risk factors of a selected index on a cost effective basis.

Midcap index fund is the new vehicle for equity index investing as the Midcap stocks which give better returns and the index show a significant growth in the past five years.

In this regard the proposed MBSL Midcap index fund will be the new vehicle for middle range investors to get stable above average returns annually within a time horizon of more than 1 year to five years.

Further MBSL plans also to launch MBSL - SmallCap Index which captures the price movements of small capitalised companies.

The selection criteria for the SmallCap Index are market capitalization, liquidity and profitability.

The SmallCap index would be beneficial in tracking the price movements of small capitalised companies listed in the stock Exchange.

TABLE		MIDCAP 	MPI*	ASPI*	Inflation one year
						Treasury bill  rate
2000		-23%	-25%	-22%	6.2%	12.2%
2001		66%	46%	39%	10.8%	18.7%
2002		31%	31% 	33%	11.3%	13.7%
2003		35%	50%	27%	5%	9.8%
2004		22%	9%	42%	13.8%	8.2%
2005		18%	18%	27%	8%	8.4%
2006		43%	42%	34%	17.2%	11.5%
Simple annual
average return  27.5%	24.6%	26%	10.3%	11.8%
Compounded annual
average return  24.9%	22.1%	25.4%	10.2%	11.7%