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FINANCIAL CHRONICLE™ » DAILY CHRONICLE™ » Rising interest rates sends bourse nose-diving

Rising interest rates sends bourse nose-diving

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CSE.SAS

CSE.SAS
Global Moderator

The market continued with a nose dive during majority of the week. Negative factors attributing to falling prices were high interest rates. Although the policy rates were not changed, it was evident that Treasury Bill interest rates for 3-month, 6-month and 1-Year were higher and sentiments indicate that interest rates may increase further.

Reflecting the alternative investment choice available to some investors, the ASPI shed 61 points to close at 4867.52 points, while the Milanka index shed as much as 49 points to close at 4311 points. Stocks that slid in the past week of activity included CDB non voting at Rs.29.50 down 25.8%, SMB Leasing non voting at cents -/30 down 25%, Udapusselawa closed at Rs.17.90 down 18.2%. Shares that shone in a falling market included Capital Alliance Finance closing at Rs.27.20 up 23%, Tangerine closed at Rs.86.00 up 21.6%, Laugf’s Gas Non Voting closed at Rs.15.00 up by 15.2%.

Reflecting depressed market sentiments on Tuesday too, the market registered a fall of 19 points on the ASPI continuing with the decline seen on the previous day. Once again on Wednesday, the market dipped a further 37 points on the ASPI leaving little room for small time players. However, Tuesday’s and Wednesday’s trading were marked with large quantities amounting to 4.7m and 8.6m shares in PC Pharma and quantities of 4.7m and 4m shares in PC House Holdings being traded. While a quantity of 2.3 m shares in HNB non voting changed hands on Tuesday which could be the reason for a higher foreign inflow recorded on the same day.

Market witnessed an increased interest in quality stocks with the result that shares in Aitken Spence transacted at Rs.115 to Rs.113. The quantity transacted on Tuesday alone was 493,407 shares. Among other major transactions recorded on Tuesday were those of Palm Garden 2m shares contributing to the day’s turnover of Rs.914m, being the highest turnover achieved for the entire week. While on Thursday, turnover was dominated by Laugfs Gas Non voting 1.6m shares closing at Rs.14.20 , Kelani Tyres 3.7m shares closing at Rs.25.60 and trading in the shares of Sampath Bank 164,680 shares closing at Rs.150.20.

High interest rates have a three-fold negative impact on the stock market, first is that investors have a secure fixed income return investing in interest bearing products such as treasury bills. Second is that corporate profitability comes under pressure when interest rates increase due to increased borrowing rates and a corresponding decline in profits due to high cost of funding. Hence, share prices have an inverse relationship with rising interest rates. Lastly, margin traders do not see any incentive to buy shares as the market slows and also cannot justify high interest borrowings to fund purchase of stocks.

Courtesy: Innovest Investments Pvt. Ltd. an Investment Management Company licensed by the Securities & Exchange Commission of Sri Lanka
http://www.island.lk/index.php?page_cat=article-details&page=article-details&code_title=56871

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