Panic selling drags indices down

The positive momentum in the market was unexpectedly disturbed this week amid the arrest of US based Galleon Group founder Raj Rajaratnam under alleged insider dealings.

However, after the sharp initial fall bargain hunters promptly took positions in fundamentally sound stocks, providing substantial support for indices during two trading sessions. Overall the ASPI (All Share Price Index) slid 75.3 points or 2.4 percent to close the week at 3056.6 points this week. The MPI (Milanka Price Index) closed the week at 3434.0 points down by a 112.9 points or 3.2 percent compared to last week’s closing levels.

Index heavyweight JKH was the highest contributor towards turnover this week, contributing Rs.257.8 million. The major portion of the contributions came on Wednesday amounting to Rs.103.8 million on the back of two crossings at a price of Rs.140.00 per share.

The counter closed at Rs.144.50 per share on Friday showing a 5.6 percent decline in share price Week on Week (WoW) after trading a total volume of 1.8 million shares for the week.

Banking counters were in the forefront this week in terms of contributions towards weekly turnover as seven out of the top 10 contributors for the week came from banking sector, with Seylan Bank- Non Voting leading the way.

The counter which became the week’s second highest contributor managed a turnover of Rs.175.1 million during the week, while trading between a range of Rs.15.50 and Rs.17.75 per share. The share price dipped WoW by 2.8 percent to close at Rs.17.25 per share.

Negative investor reaction on the banking counter NDB, which the Galleon Fund has a considerable stake lost 6.0 percent WoW in value to close the week at Rs.189.00 per share. The share traded at a high of Rs.199.25 per share and a low of Rs.180.00 per share, contributing Rs.156.7 million towards weekly turnover. A modest 0.8 million of shares were seen trading for the week.

Apart from the conglomerate stock JKH, Browns and Chevron were the remaining non-banking counters among the week’s top 10 contributors. Browns retained investor appetite with 1.6 million shares trading this week.

The share price declined WoW by 4.5 percent to close the week at Rs.80.25 per share, while trading between a wide range of Rs.70.50 and Rs.84.00 per share.

The counter contributed Rs.126.6 million towards weekly turnover becoming the fifth highest contributor towards weekly turnover.

Total turnover for the week stood at Rs.3.3 billion, witnessing a 48.7 percent decline compared to last week Average daily turnover, meanwhile stood at Rs.658.3 million compared to over Rs.1.0 billion posted last week.

Meanwhile, foreign participation for the week was low at 12.5 percent of total activity this week compared 26.0 percent recorded last week. Foreign purchases stood at Rs.369.6 million, while foreign sales stood at Rs.455.6 million, resulting in a net outflow amounting to Rs.86.0 million.

Volume wise the highest traded stocks for the week were, Vallibel, Seylan Merchant (Non Voting), Sierra Cable, Seylan Bank (Non Voting) and Dialog.

Point of View

Market to remain mixed

Market took an unexpected beating this week as news over the alleged insider trading case against US based Galleon Group, one of the top investors in the Colombo bourse, led to some panic selling by investors on index heavy weight counters. Week on week the ASPI fell by 2.4 percent, while the more liquid MPI declined 3.2 percent, however, activity levels dropped compared to last few weeks.

No requisite for panic selling

Over the coming week we expect the market to remain mixed backed by a combination profit taking and bargain hunting. We strongly advise the investors not to engage in panic selling without a proper analysis of the possible consequences; if at all Galleon funds have to sell their stakes to be in cash to counter a possible run on related funds.

In our opinion most of the sizeable positions held by Galleon funds were on fundamentally sound stocks and in fact the investors we believe should welcome the opportunity, if they could buy these stocks at cheap prices.

Key holdings of Galleon related funds as of June according to interim reports submitted by respective companies were as follows (refer table below).

Based on current prices the total value of investments of Galleon funds accounted for around 0.5 percent of the total market capitalization as of 23 October.

Apart from the Galleon Holdings, the founder Raj Rajaratnam held a 8.6 percent stake in John Keells Holdings (JKH), which valued at Rs. 7.6 billion as of 23 October 2009.

Meanwhile, the news reports over the potential loss of the GSP+ scheme following the release of EU’s investigation report this week also took investor attention.

However, the Central Bank in a press release noted that the total value of the benefits in terms lower import duties under the GSP+ scheme in 2008 was 78 million Euro and hence, the loss of preferential duty margin by around 6-7 percent arising from a potential withdrawal of the GSP+ facility wouldn’t have an adverse impact on Sri Lanka’s exports.

While the indirect impact of such a withdrawal on the local economy still remains largely unclear, we do not feel that the news was a key factor in the market’s downturn this week. In fact the uncertainty over the GSP+ scheme has been overshadowing the market for sometime and to some extent had already been discounted. While monitoring these developments we believe the investors should keep a close eye on earnings announcements that will be released over the coming weeks.

Further, given the expected volatility of the market over the coming week, we continue to advise the investors to look for buying opportunities with a medium term focus.

The information contained herein has been compiled from sources that Acuity Stockbrokers (Private) Limited (ASB) believes to be true and reliable but we do not hold ourselves responsible for its completeness or accuracy. No matter published herein create any liability of any kind on ASB.

All opinions, views, findings and conclusions included in this report constitute ASB’s judgment of this date and are subject to change without notice.

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