Reviving the Colombo Stock Market

K.A.S. Perera

In the recent past our stock market has witnessed a sharp decline culminating in a free fall on October 23 with a loss of 85 points representing a drop of 4.7%. The all share index which recorded 1815 was a 3 1/2 year low.

In a recent article the following factors have been highlighted by the author for the financial turmoil in developed countries including USA and the EU.

01. Sub prime loans

02. Credit crunch

03. Recession

It has been stressed that factors (01) and (02) have no relevance to our stock market and our country would be least affected due to the recession in develop countries.

(A) Recession factor

It is observed that stock markets have been plummeting in many developed countries due to recession fears in the past two weeks and it is worth analysing the salient features.

(1) Many developed countries in Asia such as Japan, Taiwan, South Korea, Singapore have export driven economies mainly to USA generally consisting of cars, electronic items etc., which are considered luxury. On the same basis, some countries in Europe such as UK, Germany, France and Italy would be affected since drop in volumes and prices would lead to closure of factories and job losses.

(2) Countries such as Australia, Russia, Brazil, Canada etc., would be effected as main suppliers of raw materials due to the reduction in volumes and prices. Russia in particular is badly affected due to the price decline of oil.

(3) Countries such as China and India are expected to record growth of 9.3% and 6.9% respectively for 2009. According to the ADB report, they have received massive foreign funds in the past has seen large withdrawal of funds by hedge and mutual funds due to redemption requests by customers.

The sharp decline of market in this case is not due to three factors affecting developed countries.

Consequently most of the developed countries are either in recession or would be in recession from the current quarter. In fact England has announced a negative growth of 0.5% for the third quarter after 16 years.

It is therefore expected that many quoted companies dealing with motor vehicles, luxury consumer items, petroleum products, building materials etc., along with financial institutions would record losses or substantially reduced profits from the quarter ended September 30, 2008. It is not surprising that the price decline of these shares would drag down respective stock markets further.

In comparison our country which recorded over 6% growth from 2006 is expected to record similar growth in 2008 and 2009. In fact our growth for second quarter is 7%. Our main items of exports such as tea, coconuts, garments, fisheries products etc., are essential and would be fully absorbed locally and abroad. However price reduction of our exports is logical as experienced at present with buyers as in other commodity markets reducing buy orders in order to bring down the prices.

This should be viewed in the context of decline of oil prices from US$ 147 to around 65 which amounts to over 50% decline. Considering the fact oil imports account for 1/3 of our imports the country would be in a position to save around US$ 1300m annually.

It is the considered view that the gain would more than compensate the impact from decline in prices of our export items. In addition price of our imports including food items, such as wheat, sugar and fertiliser are expected to decline and positively impact trade balance.

It should be noted that 85% of our quoted companies including financial institutions generally would not be affected from the recession mainly in the developed countries. Due to the above average performance in the first half even plantation companies despite decline of tea and rubber prices are still expected to record a satisfactory growth during the current financial year.

(B) Immediate steps necessary for the revival

(1) Telecom and Dialog the highest capitalised companies which have a significant impact on the index had declined 28% and 73% respectively and authorities concerned should persuade foreign major shareholders to defend the current price levels by increasing their shareholdings.

It is very advantageous and prudent for the foreign investor of Telecom to buy at current level which is around Rs. 13 less than the price paid to acquire substantial portion at Rs. 50.50 which would reduce average cost.

Similarly JHK which had declined almost 70% from all time high should be defended at present price level by further buy back arrangements from the company.

The company has already announced a buy back of 4% at a price of 90 to be operated from November 4, 08. Similarly Ceylinco, CF LB and Stassen Group etc., should be persuaded to defend price levels of their quoted companies by increasing shareholding of subsidiary companies who have controlling interest.

It is important to note for the purpose of maintaining company image and obligation to protect minority shareholders this matter should receive immediate attention.

This should also be viewed in the context where even governments of USA, UK, France etc. today by equities of many banks to protect stock markets.

Above named companies have immensely benefited from investors through the stock market in the past and this is an ideal opportunity to show little gratitude in return.

(2) The Government should arrange financial institutions such as Government banks including NSB, ETF etc., to involve more in the equities. For instance increase of even 2% of the EPF and ETF funds would have a substantial impact and would give attractive return in the medium to long term.

(3) In the earlier article recommendation has been made to increase the present margin of 50% to 65% and forced selling from 60% to 75% for a short period as a temporary measure. It should be noted sharp decline of prices during the past few days created a situation where even an investor with a comfortable margin of say 30% going over 60% and losing due to forced selling.

Had the regulatory authority taken a prompt decision this situation could have been arrested and prevented losses to many retail investors. Since this is an exceptional situation which require exceptional solutions a decision in this regard could have been taken at a emergency board meeting.

Since the market has dropped substantially balance 25% at worst level would ensure no risk to the brokering companies. Further except for a very few, such companies are either subsidiaries of banks and cash rich conglomerates such as Orix Leasing, JHK etc,. Further this enhancement could be made optional so that it would be left to the respective brokering companies to implement it based on their requirements.

(4) Majority of the stockbrokers are committed to develop the stock market but a few had failed to realise that this is not a forum to promote political agenda of opposition parties. A person may have a political affiliation, but nowhere it is seen affecting other economic activities such as banking, insurance, industries, agriculture, other service sectors.

It is not uncommon they even spread exaggerated or imaginary information among other brokers and investor public which are adverse to the stock market. The print and electronic media should be careful in obtaining their comments. Even a handful expect a change of regime to activate the market not realising the fact the ASI peaked under the present Government in 2006.

The primary duty of a stock broker is to promote the stock market with dedication and commitment which is their bread and butter whilst safeguarding the interest of their clients. This type of attitude is unprofessional, unethical and self destructive and it is the considered view such persons should not be in the business of stock brokering.

The party in power which historically was not strong in economic management and economic development has completely turned around and since 2005 engaged in a massive infrastructure development projects including Roads, (Colombo-Matara, Katunayake-Colombo, Colombo-new network), Power (upper Kotmale, Norochchlai, Sampur, Kerawalapitiya), Ports (Hambantota etc.,) Irrigation (Moragahakanda, Uma Oya etc.,) whilst pursuing a campaign to eliminate terrorism in a professional manner which even opponents of the Government grudgingly now admit.

(C) Long term strategies:

1. Reconstitution of SEC and CSE boards:- It should be stressed regulatory authorities and brokering companies are financed by the stock investors and therefore the most important factor in the stock market.

The retail investors constitute 98% of the investor community running in to a few lakhs and benefits derived by them are more beneficial to the economy and for distribution of wealth. In fact if one analyses the balance sheet as at 31.03.07 of two State Commercial Banks, the main pillar of strength is millions of small savings depositors who have saved Rs. 267 billions and not the affluent class.

Accordingly it is essential two directors each appointed to both Colombo Stock Exchange and Securities and Exchange Commission from the retail investors to look after the interest of the retial investors.

Such appointees should be knowledgeable, educated, courageous, acceptable and should have time to devote fully in this regard. Such persons should not be a mere rubber stamp and responsible only to the retail investors.

2. Customer Lobby:- The customer auditorium at the Stock Exchange head office has been closed a few months back after many years of operation. This was a forum where many investors gathered and engaged in healthy discussions which ultimately benefited the entire brokering community and lakhs of investors.

It is a well-known fact that thousands of brokers and investors use to contact those at the auditorium daily for the latest information on stock market. We are now informed that the Kurunegala auditorium too has been closed.

The retial investors are unanimous, the auditorium is essential and closed not for security reasons. The retailers feel this may be due to change of attitude after the resignation of two eminent persons, namely Rienzie Wijetileke and Eraj Wijesinghe who were always concerned for small investors.

As suggested CSE should make arrangements to open an auditorium outside Pettah and Fort with parking space which could be even partly funded by stock brokering companies. As market strategy similar facilities should be established at Galle, Ratnapura, Kegalle and Anuradhapura etc.

3. There is immense potential in provinces in mobilising deposits for the stock market and it is the considered view this opportunity has not been properly exploited.

4. Due to the impending recession, countries such as USA reduced the prime rate by 50 basis points to 1 1/2 recently with a view to stimulate the economy and this could be ultimately reduced to even 1/2 per cent.

At present flow funds are moving towards USA even from countries such as China and India due to other factors.

However once the volatility in the financial market is stabilised this trend may reverse and countries in Asia such as India, China, Malaysia, Sri Lanka not unduly subjected to recession would be attractive and the brokering community should obtain maximum benefits at the appropriate time.

Our country is fortunate to be one of the least affected countries from the financial turmoil and the stock market is very attractive with a preset P.E. of 6.5. There is no doubt any investment made today would in the medium term, give a return far in excess of any other investment including treasury bills.

It is the duty of all connected to the stock market including stock brokering companies to educate their employees and investors on real potential of our market so that financial benefits would accrue to all.

(The writer was a member of the executive management of a state bank with 35 years experience and presently a senior consultant in banking, finance, investment, restructuring and industrial projects.)