The Colombo bourse in just four weeks has returned to being among the best performing markets in the world from a worst performer but concerns are being raised over alleged manipulation of junk stocks and an impending credit bubble, analysts say.
The AllShare Index (ASI) has risen sharply by 22 per cent or 800 points since August 29 with the entry of Nalaka Godahewa as the new chairman of the Securities and Exchange Commission (SEC). His appointment has been challenged by sections of the industry and the parliamentary opposition on the grounds of established links to powerful businessman Dilith Jayaweera whose has an active stock market investment unit. Since August 22 amidst speculation about Dr Godahewa’s appointment (he was appointed on August 28), many penny stocks have risen in price up to now. Amongst these Central Investments and Finance Ltd (up by 97.5%), Hayleys Management Knitting (up by 90.47%), Ceylinco Seylan Developments (up by 77.8%), the Colombo Fort Land & Building (up by 48.57%), Nation Lanka (up by 75%), Malwatte Valley (up by 60%), Panasian Power (up by 24%), Citrus Kalpitiya (up by 22%), Freelanka Capital Holdings (up by 40.9%) and Watawala Plantations (up by 51.72%) stood prominent. Fundamentals for improved sentiment haven’t changed in the market. Concern is also growing over the market returning to casino style trading similar to what happened in 2010.
“The interest rate scenario, the exchange rate scenario and the balance of payment deficit are still issues, corporate debt will cost more money and earnings will suffer. All this however will mean very little to the retailer and the market manipulator,” one analyst said. “Retailers hope to make a quick buck and leave the market before things get ugly and the latter will continue with hopes of never having to face the music for what they do,” he said. Asked about the reasons for the significant rise in the market, Deshan Pushparajah, Head of Capital Markets told the Business Times that the market was undervalued for a while and it required a catalyst. With foreign buyers coming in, it got activated.
“So the fundamentals haven’t changed, but the market has now adjusted to the fundamentals,” he said, adding that what is being witnessed now is not yet a bubble, as the market is still fairly valued and there are shares yet which are undervalued.
But given that overall volume of trade that has increased, then credit extension would also have increased, he noted. “The market may have run up too much too fast, so we may be in for some profit-taking soon,” he added. Sentiment has changed drastically. “Shares have dropped to rock bottom prices making it one of the most attractive markets among emerging markets,” noted another broker, adding that foreign inflows were pouring and all it required was a trigger for the market to turnaround.
The Business Times asked Dr Godahewa for his comments which he politely declined on the grounds that he was heavily involved in work and preferred that the newspaper contact another senior official at the SEC. Danushka Samarasinghe, Director Research TKS Securities said no fundamental reason can be attributed to the rising market other than market psychology.
“The local high net-worth investor sentiment has changed positively leading to more participation in the market. Certain investment styles or stock picks are highly individualistic and hence high net-worth investor interest was seen on both blue chip large cap counters as well as small cap stocks.” He said that with the country’s economy expected to record robust growth the listed corporates would also mirror such prospects and hence the future for the CSE would be bright.