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FINANCIAL CHRONICLE™ » DAILY CHRONICLE™ » MPI’s Rise Raises Questions About Its Composition

MPI’s Rise Raises Questions About Its Composition

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Redbulls

Redbulls
Director - Equity Analytics
Director - Equity Analytics
Friday’s Fall Corrects Wednesday’s Manipulative Gains

The stock market, like humpty dumpy, had a great fall at Friday’s trading. The benchmark ASI fell by 25.31 points (0.5%) to close the week at 5,012.84 points and the more sensitive MPI by 56.29 points (1.2%) to close at 4,636.53 points (over the previous day’s closing figures of these indices) on a low Rs. 265.8 million turnover, according to Colombo Stock Exchange’s (CSE’s) provisional results.

When this reporter asked a stockbroker the reason behind this steep fall, he said that query instead should have had been as to why did the market rise so steeply two days ago, ie on Wednesday?

On Wednesday the ASI rose by 82.27 points (1.66%) and the MPI by 99.07 points (2.16%) on a Rs. 783 million turnover. The source alleged that those gains were due to the activities of certain unscrupulous brokers who fed gullible retail investors’ stories that the bourse is now on the upward swing after the “removal” of the Securities and Exchange Commission (SEC) Chairman Tilak Karunaratne who, at the time of his “sacking” was investigating certain manipulative trades.

SEC functions under President Mahinda Rajapaksa in his capacity as Finance Minister. Eight months ago Karunaratne’s predecessor Ms. Indrani Sugathadasa was also “shown the door” for not bending down to manipulators’ demands to stop investigations against them.

Despite this “doom and gloom” situation revolving round the bourse, the only bright spot are net foreign inflows (NFIs) experienced by it thus far for the year. The stock market up to Thursday had experienced a Rs. 28.5 billion (US$ ($) 216 million*) NFI**, mainly centred on stocks such as blue chip John Keells Holdings plc (JKH), Lion Brewery, Ceylon Brewery, Aitken Spence, Commercial Bank, Nestle and Ceylon Tobacco, which, ironically are not reflected on the MPI, an index that is suppose to capture the price movements of blue chip stocks in the market.

The source said that due to the very structure of the usually “blue chip” MPI which gives weightage to indicators such as market capitalization in the CSE’s selection criteria for stocks to be included in that index, some penny stocks too as a result have also crept into the MPI in its latest revision, thereby casting doubts as to whether the MPI truly reflects the movement of blue chip stocks?

Some of those penny stocks which have now been included in the MPI composition are held by those alleged manipulators who also boosted their values at Wednesday’s trading, thereby also upping the value of the MPI as a whole in the process.

In the Colombo Stock Exchange’s (CSE’s) latest revision of the MPI, it dropped blue chip stocks such as Aitken Spence PLC, DFCC Bank, Distilleries Company of Sri Lanka PLC, Hatton National Bank PLC, Lanka Orix Leasing Company PLC, LB Finance PLC and Royal Ceramics Lanka PLC and instead included stocks such as Nation Lanka Finance PLC, PC House PLC, Browns Investments PLC, East West Properties PLC, Expolanka Holdings PLC, Janashakthi Insurance PLC and Lanka Orix Finance Company PLC to comprise its composition and thereby reflect what the CSE feels are the movement of blue chip stocks listed on the bourse.

Some of those stocks deserve to be in the new MPI composition, but there is a doubt in regard to others.

The movement of the MPI is said to reflect the movement of the value (prices) of blue chip stocks. But if some of the “true blue” chip stocks are not reflected on the MPI, and, instead those being substituted by “junk” stocks, then it raises the question as to whether the MPI in actual fact reflects the movement of bona fide blue chip stocks listed on the Colombo bourse?

Meanwhile the bourse at Wednesday’s trading also enjoyed a Rs. 192.54 million ($ 1.5 million*) NFI.

The following day Thursday the ASI gained by a moderate 10.75 points (0.21%) while the MPI for seemingly no inexplicable reason fell by 1.17 points (0.02%) on a Rs. 634.9 million turnover whilst returning a Rs. 134.56 million ( $ one million) NFI.

Meanwhile at the beginning of last week, ie on Monday, seeming manipulative trading on blue chip JKH, where such stock was bought in small doses on that day’s trading, helped to push the ASI up by 22.33 points (0.45%). The more sensitive MPI rose by 9.83 points (0.44%).

“The bearing on market indices such as by a stock like JKH is so high, that small quantities of such transacted at premium prices are enough to hike those indices (In this instance the ASI),” the source added.

JKH closed that day up Rs. 2.90 (1.44%) to Rs. 197.90 on a share, on a total volume which added up to 87,634 shares transacted.

“They, the manipulators, still have a host of junk stock in their bag worth several hundred million rupees. So, their modus operandi is to try to take up the indices and then dump such junk stocks on to the laps of
unsuspecting investors who would wrongly think that the bourse has once more taken off in a’ bona fide’ way,” he said.

The other major contributors to Monday’s trading was the transfer of a block of Asiri Hospital shares controlled by business magnate Ashok Pathirage of Softlogic fame and foreign buying of Lion and Ceylon Breweries controlled by Hari and Mano Selvanathan of Carsons Cumberbatch fame which helped push turnover to Rs. 1.8 billion, whilst recording a NFI of Rs. 980 million ($ 7.4 million*) on that day.

Otherwise the bourse had nothing much to shout about, the source said. And, as if to prove his point, the bourse, the following day Tuesday returned a turnover which was a fifth of the previous day’s turnover, ie a sum of Rs. 366.9 million, with the only silver lining being that the market received a Rs.108.18 million ($ 0.8 million*) NFI on that day.

*On the basis that 1 US$=Rs. 132

** However the market recorded a net foreign outflow of Rs. 63.66 million ($ 482,000) at Friday’s trading.
http://www.thesundayleader.lk/2012/08/26/mpis-rise-raises-questions-about-its-composition/

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