Golden opportunity to invest in CSE

The recent sharp decline in the stock market needs careful analysis to ascertain whether such trend has any valid basis. The following facts would confirm as agreed by knowledgeable analysts that the level of decline and its consistency has no valid and rational basis.

1. World equity market - Suddenly it has become a fashion since October to look at daily developments in stock markets in USA, Europe, and Asia by some brokers and investors with the false notion our market too should follow global trends. Except during 1993/94 bull market driven by foreign funds it was evident ever since hardly stock brokers/investors discussed world stock markets seriously.

It is a fact that since 93/94 our market generally behaved independently and did not move in line with bullish and bearish trends in overseas markets. For instance, our market from 1995 to 2002 continued to be very bearish and no brokers, nor investors uttered any positive remark that the market should move up in line with bullish trends in overseas markets.

When the market moved up during the period 2002 - 2004 this was not due to overseas market trends but due to public perception of a new market friendly Government. Interestingly there has been no utterances of world markets by brokers/investors during these periods. Similarly our market has not been active and little bearish during the recent past at a time many markets in the Western world and Asia including China and India experienced bullish trends until recently. Again no discussions have been initiated by brokers/investors and even research reports that our market too should respond to world bullish trends.

It is very puzzling and a mystery how bearish world market trends suddenly become subject of discussion by brokers/ investors recently and this may be due to reasons as follows:-

An attempt by anti-national elements and a powerful few connected to opposition party to bring down the market to undermine achievements of the Government specially in massive development projects undertaken and the security sector.

A classic example of such action is when the capture of Toppigala was announced mid-day last year the market suddenly plummeted when the market in fact should have jumped in response to the good news. It is obvious that this is not an innocent act and done with ulterior motive.

Institutions, high net worth individuals etc., very knowledgeable may find it advantages to maintain the market at low level to accumulate shares dirt cheap knowing very well future flow of funds to Asia again is possible, and the bright prospects arisen from the fact that ongoing war is coming to an end very soon.

Case in point is the present price level of JKH at around Rs. 55/- which despite recent scandal justifying a higher price after dropping 70% from a all time high. It is therefore very advantageous for some who opted to buy back arrangements at Rs. 90/- to collect what has been sold earlier at current level where a difference is a cool Rs. 35/- without any tax.

Most of the brokers and investors are ignorant of the factors that led to the present financial turmoil too are innocent victims of this campaign.

They too are stating that our market decline is due to world market decline. In fairness to the many brokers and investors it is natural they really are unable to understand complex subject of sub prime loans, credit crunch and recessions that led to the financial turmoil and more difficult to understand implications arisen from such factors on our economy and the stock market.

It is very unfortunate that it is the small retail investors who have been selling during a last two months and bought by more affluent high net worth customers, institutions etc.,

2. Decline of stock markets in USA, Europe, Asia

In an earlier article under “World financial turmoil and Colombo Stock Market” it has been explained the factors that led to the financial turmoil.

Due to various steps taken by many governments, problems relating to sub prime loans and credit crunch have been partly settled and will continue to affect such markets to a lesser degree in future too.

However the recession which USA, Europe Zone, UK, Japan, South Korea, Singapore etc. presently experience is expected to continue for major part of 2009 and may lead to further decline of such markets at least first half of 2009. It is expected financial institutions including banks, exports oriented auto companies, and those related to consumer items and general trading are expected to perform poorly and would contribute to further decline of markets.

Strength of Colombo Stock Market

Fortunately for our market, it has been generally bearish for nearly one year when the markets overseas commenced decline and further decline therefore was technically limited. Similarly we have not attracted substantial foreign funds specially from hedge funds operated in Asia. Most of the inflow of funds during the past two years came in as strategic buying and not purely for trading.

It is relevant to mention, countries such as China and India attracted in the past huge amount of foreign funds from hedge funds etc., and due to the financial turmoil similarly massive sums are being now withdrawn by such funds to meet redeem request of their customers. Similarly other funds too are withdrawn to meet liquidity crisis in western countries. Decline of Indian and Chinese market is mainly due to this factor.

It is estimated the country’s GDP would grow at least by 6% in 2009 and IMF which is very conservative in estimates even after further evaluation expects a growth of 5.8% which would be very commendable at a time when USA, almost all the countries in Europe, several developed and developing countries in Asia, such as Japan, Taiwan, South Korea, Phillipines, Singapore, Hong Kong, already recorded negative growth and expected similar trends during major part of 2009.

Our country would be least affected due to recession in the western world since our major exports are basic necessities such as garments, tea, coconuts and subsidiary crops including spices.

It is likely to effect prices of these items with lower margin but the volumes would be least affected. For instance present crisis in tea trade is mainly due to buyers placing minimum orders to bring down the prices. It is natural a buyer who places orders for two months requirements, for instance would now reduce it for one month.

Most of our tea which is lower grown are consumed in middle east and CIS countries which are middle or high income level and such people for instance who are used to three cups of tea a day would not reduce this practice under any circumstances.

On the other hand our import bill would be drastically reduced due to the sharp decline of oil by around 65% and other major items of imports such as wheat, sugar, fertiliser etc., Even if price of oil fluctuate between 50-60 dollars a barrel, country would be able to save nearly 2000m dollars in 2009.

It should be noted export revenue from garments ranks top position but since this is mainly based on imported fabric, the net earnings is definitely below foreign remittance and tea revenue. It should be noted reduction of garment prices would be partly compensated from the price reduction of imported fabric.

The recent budget had imposed higher import duties and margin on luxury items and this too would help our balance of payments. With foreign remittance which is the major factor in the balance of payment expected to grow next year it is very clear commodity crisis resulting from recession would ultimately have favourable impact on our balance of payment in 2009.

It is an undisputed fact despite appreciable growth recorded by our country since 1983 adverse security situation prevented the country in exploiting its true potential in achieving a higher growth. If not for this adverse factor the country would have attracted huge amount of investments for sectors such as hotels, real estates, stock markets, infrastructure projects, etc.

In fact despite bullish trends from time to time security factor had affected our stock market past 25 years. Considering the fact eastern and almost entirety of north-west have been cleared and the 25-year war is coming to an end soon it would be a golden era for the country and specially our stock market.

Once the volatility in the financial sector subsides the present flow of dollars to USA would flow back to countries expected to record positive growth in 2009/2010. Due to the low interest regime where prime may drop to 1/2% as predicted by the author in an article on recession, investors presently holding on to huge cash reserves would be compelled to invest part of their reserves in equities in countries such as China, India, Sri Lanka with positive growth.

It should be noted except for a few export oriented companies many quoted companies would record positive performances. In fact several companies for the last quarter ended September 30, 2008 recorded positive growth i.e. sugar, commercial, PABC, CIC, Savings, Dimo, Sampath due to the above fact coupled with factor under (D) it is likely our stock market may witness a real sustained bull run as witnessed during 93/94 period.

In the near term apart from positive factors under III A,B,C, the investors/brokers should pay a very special attention to security developments presently taking place that would end the 25 year conflict shortly.

This is the factor that affected potential growth in sectors such as hotels, real estates and specially stock markets and after 25 years this may lead to a golden era for Colombo Stock Market.

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