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By Abdul Azees
Last week, with plenty of theoretical zeal, we tackled the pertinent question of whether stock markets were, in fact, casinos. The studies we looked at were broad based and considered certain key traits of a stock market and an economy in order to decide if there was a connection between stock market growth and economic prosperity.
They concluded that there was indeed correlation between stock market growth and economic prosperity (given certain conditions prevailed in the growth itself along with some underlying economic phenomena) However, studies like these can be tricky and while they look good on paper, the conclusions are drawn from a broad set of numbers that are handpicked by researchers, crunched according to methods which they feel are appropriate, and then spiced up to produce a final product that can either be sweet, sour, salty or any number of permutations of the above.
This applies to the layman at least, and unless you are the kind of person that can tell what exactly went into a cocktail just by tasting it, you are at the mercy of the bartender.
So anyway, what was the whole point of the preamble above? Was it to discredit the studies looked at last week? Was it some sort of deep seated urge to transfer my usually cynical outlook on the world to my analysis of our stock market? No.
It was merely to say that the studies we looked at might not be completely conclusive when looking at individual countries, especially those just beginning to enter an era of supposed prosperity and taking advantage of a large availability of surplus capacity like ours.
Sri Lanka Vs. US
Stock markets in Sri Lanka and the U.S. for instance will differ greatly. If you look at the studies,the metrics they have chosen as ‘success factors’ are a lot more complicated than simple growth in a market cap like we have had here in Sri Lanka. And the fact of the matter is that the economy cannot just grow because firms get more money through IPOs. They must be able to invest that money in a profitable way and this depends a lot on the prevalent fundamentals in the country like a skilled workforce, actual demand, infrastructure availability, ease of doing business and good governance. If these things don’t materialise in Sri Lanka, investors will soon realise that the actual promise they saw in the country will never happen and they will withdraw.Also the volatility of our stocks are really high, i.e high sales volume will cause big fluctuations in price levels.
And most of our investors are in it for that speculative hike in prices and will not really exert any pressure on the firms to improve corporate governance. Also economic fundamentals that are necessary for growth seem to be slow in coming. So if you look at these factors and then consider how Sri Lanka might have fitted into the criteria used in those papers I am not sure that it would have looked all that positive for us.
The stock market has likely boomed because a lot of stock on it was heavily undervalued and investors felt that the war being over was a good time to cash in on a market that is probably going to head quickly up to a rate where it would have been, had there not been a conflict. But now it is overheated, and even though we have done well so far this year there are wide expectations of a long term stagnation or an immediate crash of sorts coming up.
The Fundamentals
Also, one can’t just look at a stock market, especially a speculation driven market like ours (I don ot mean to generalise, but this happens a lot in the short term) alone and expect to point to the economy and expect it to grow. No. An economy needs strong fundamentals and like we said last week, it is a chicken and egg scenario. What comes first the fundamentals or the stock market growth? That is the key question that does not really have an answer, but it is clear that both have an equally important role to play.
What are the fundamentals I’m talking about? Well good governance is one, long term growth oriented policy making is another. Ease of doing business is very important in my book and individual companies’ and the prevalent management style in the country, while a purely behavioral aspect is key. The Japanese are excellent managers and hard workers, so are the Indians, the Americans are renowned for their creativity and animal spirits, and these are things that drive growth at the purely human level of the economy, which is of course the only really important level there is. Strong institutions are a must as well; law enforcement, public services etc.. Education, well, education is probably the mortar that holds it all together, because where will we be without knowledge?
An interesting thing to do would be to look at the above aspects individually and see if Sri Lanka has them. We run into many of these things on a daily basis and it doesn’t take an economics degree to judge for instance, if our law enforcement is growth friendly. Incidentally, I hope you are wearing your seat belt.
Short URL: http://www.thesundayleader.lk/?p=48519
Last week, with plenty of theoretical zeal, we tackled the pertinent question of whether stock markets were, in fact, casinos. The studies we looked at were broad based and considered certain key traits of a stock market and an economy in order to decide if there was a connection between stock market growth and economic prosperity.
They concluded that there was indeed correlation between stock market growth and economic prosperity (given certain conditions prevailed in the growth itself along with some underlying economic phenomena) However, studies like these can be tricky and while they look good on paper, the conclusions are drawn from a broad set of numbers that are handpicked by researchers, crunched according to methods which they feel are appropriate, and then spiced up to produce a final product that can either be sweet, sour, salty or any number of permutations of the above.
This applies to the layman at least, and unless you are the kind of person that can tell what exactly went into a cocktail just by tasting it, you are at the mercy of the bartender.
So anyway, what was the whole point of the preamble above? Was it to discredit the studies looked at last week? Was it some sort of deep seated urge to transfer my usually cynical outlook on the world to my analysis of our stock market? No.
It was merely to say that the studies we looked at might not be completely conclusive when looking at individual countries, especially those just beginning to enter an era of supposed prosperity and taking advantage of a large availability of surplus capacity like ours.
Sri Lanka Vs. US
Stock markets in Sri Lanka and the U.S. for instance will differ greatly. If you look at the studies,the metrics they have chosen as ‘success factors’ are a lot more complicated than simple growth in a market cap like we have had here in Sri Lanka. And the fact of the matter is that the economy cannot just grow because firms get more money through IPOs. They must be able to invest that money in a profitable way and this depends a lot on the prevalent fundamentals in the country like a skilled workforce, actual demand, infrastructure availability, ease of doing business and good governance. If these things don’t materialise in Sri Lanka, investors will soon realise that the actual promise they saw in the country will never happen and they will withdraw.Also the volatility of our stocks are really high, i.e high sales volume will cause big fluctuations in price levels.
And most of our investors are in it for that speculative hike in prices and will not really exert any pressure on the firms to improve corporate governance. Also economic fundamentals that are necessary for growth seem to be slow in coming. So if you look at these factors and then consider how Sri Lanka might have fitted into the criteria used in those papers I am not sure that it would have looked all that positive for us.
The stock market has likely boomed because a lot of stock on it was heavily undervalued and investors felt that the war being over was a good time to cash in on a market that is probably going to head quickly up to a rate where it would have been, had there not been a conflict. But now it is overheated, and even though we have done well so far this year there are wide expectations of a long term stagnation or an immediate crash of sorts coming up.
The Fundamentals
Also, one can’t just look at a stock market, especially a speculation driven market like ours (I don ot mean to generalise, but this happens a lot in the short term) alone and expect to point to the economy and expect it to grow. No. An economy needs strong fundamentals and like we said last week, it is a chicken and egg scenario. What comes first the fundamentals or the stock market growth? That is the key question that does not really have an answer, but it is clear that both have an equally important role to play.
What are the fundamentals I’m talking about? Well good governance is one, long term growth oriented policy making is another. Ease of doing business is very important in my book and individual companies’ and the prevalent management style in the country, while a purely behavioral aspect is key. The Japanese are excellent managers and hard workers, so are the Indians, the Americans are renowned for their creativity and animal spirits, and these are things that drive growth at the purely human level of the economy, which is of course the only really important level there is. Strong institutions are a must as well; law enforcement, public services etc.. Education, well, education is probably the mortar that holds it all together, because where will we be without knowledge?
An interesting thing to do would be to look at the above aspects individually and see if Sri Lanka has them. We run into many of these things on a daily basis and it doesn’t take an economics degree to judge for instance, if our law enforcement is growth friendly. Incidentally, I hope you are wearing your seat belt.
Short URL: http://www.thesundayleader.lk/?p=48519
