2011 Market In Retrospect.
Dec 31, 2011 (LBT) - Year 2011 initiated with a great deal of interest towards equity markets of developing countries as a result of low correlation of stock returns between developing markets and developed markets. At this point the Sri Lankan stock market was also performing attractively with an YTD performance of circa 96% and continued to be the Asia’s best performing stock market. Reaffirming this, during mid January the ASI reached 7,000 levels and remained somewhat attractive till the latter part of June reaching a high of 7,811 in the beginning of February, which was an all time high. Month of April started to add volatility to the market performance in the midst of administrative issues, where senior officials at the CSE giving resignation. Further, to this shaky performance, we saw investor’s cash- strapped by new IPO’s and rights issues. Even though the market offered best returns to investors since end of war, it was in a dire need for a new investor regime with new money coming in to the market. At the same time, it was witnessed that investors are being dragged out with recent regulatory rules such as margin trading limitations and restrictions on applying for IPO’s via bank guarantees.
However, these lackluster sentiments prevailed irrespective of sound macroeconomic fundamentals. In pursuit of economic growth, Central bank left the interest rates unchanged. Also the CBSL in April ordered lenders to set aside more cash as reserves, boosting the statutory reserve ratio to 8% from 7%, in a bid to drain cash from the economy and control demand, absorbed circa 18 billion rupees from the banking system. These attempts were made in the light of creating a more stable economic environment for businesses to grow.
During the mid year, though the CSE had been a top performing market during 2009 and 2010, it had failed to maintain its momentum mainly due to regulators intervention. Further to this, funds available to invest in the local markets have also been going through tremendous pressure due to investors looking in to alternative investment avenues (fixed income assets) by using the capital gains they made from the CSE, as there are investment opportunities due to the booming economy.
During latter part of June, the ASI took about face diving towards 6000 levels exposing the realistic picture through corrective measures. Further, being dragged away with the speculative rally, several investors had burned their fingers hunting in to stocks that were booming in the short-term. The indices continued to slide down, while the stocks that were pushed up without a fundamental backing tumbled, where as overall panic selling owing to this, started to affect the blue chip counters as well. The margin call was also a reason for the volatility created over. Therefore, the volatility in the indices can be apportioned to the result of investors getting trapped with stocks at high prices while several new listings for example: Heladiv Foods, Expolanka, Free Lanka capital holdings fell below their IPO prices.
During latter part of July, Sri Lanka raised $1bn after its 10 years bond was seven times oversubscribed signaling the investor confidence on the local economic development that was taking place. However the market did not respond to this stimulus as expected.
Towards mid August, brokers were requesting regulators for relaxing broker credit to investors and there was high volatility built around the issue, yet on overall the indices took its declining trend. However, supporting the broker’s request, SEC relaxed the rules on broker credit, which had a positive impact, where the market re entered the 7000 levels. But the hype created could not sustain and was dragged back to 6000 levels. By this time, the speculative pressure was high, where almost all blue chips which are driven relatively on fundamentals witnessed a declining trend in prices while non blue chips performed exceedingly well.
Nevertheless, as of end September the CSE still remained as the sole equity market record a positive growth compared with other stock exchanges in Asia. The month of November was not supportive for the bourse, emphasizing the seasonal downfall plus the investors losing confidence over the market, and ASI started to fall in to 5000 support level.
During latter part of November The CBSL devalued the rupee by 3% as a measure taken in the budget 2012 in order to spur growth in exports as Europe’s debt crisis had flawed export demand. Whereas, before the devaluation, Sri Lankan rupee had strengthened by 0.5% this year.
However, the market continued to dive further irrespective of healthy earnings posted by most of the companies. It was believed that the market had been hit by deteriorating property following an expropriation law. Further worsening the situation, the stock market regulator Malik Cader resigned from his post.
During December, the bourse continued to fail as market was going through correction after being recorded high by credit fuelled speculation. And subsequently the year 2011 closed ASI at 6,074 levels, delivering a Year to date return of negative 8.5%.
It is worthwhile to compare the changes in the indices at the closure of the year with beginning year levels, in order to take a clear picture as to how the market has performed over the year. The ASI has closed with a negative circa 8% whilst more liquid MPI closing with a negative 26%. In terms of the sector indices, the highest year to date dip was seen on Stores supplies, followed by services and Plantations sector. Further the banking and finance sector has shown a year to date dip of 15%.
On overall, the foreign interest towards the market was on the selling side, where except in the month of May the rest of the months recorded net foreign outflows, indicating the foreign selling pressure. And the highest net foreign outflow for the year was witnessed during September.