The bourse last week had the unenviable distinction of recording its 2nd, 3rd and 4th lowest turnovers for the year to date, ie making a sum of Rs. 228.2 million on Wednesday, Rs. 241.9 million on Thursday and Rs. 254.35 million on Tuesday respectively, data showed.
It finished the week with an equally dismal record, showing a minuscule Rs. 328.5 million turnover on
Friday, while the benchmark ASPI fell by 0.5% over its previous close to finish the week at 6,028.74 points and the S&P SL 20 Index by 0.2% to 3,385.43 points; whilst recording a pyrrhic net foreign inflow (NFI) figure of Rs. 43.2 million.
Additionally, last month, ie on June 24, the bourse recorded its lowest turnover for the year to date, registering a sum of Rs. 201 million.
Adding to the list of bourse’s woes, if Economic Development Minister Basil Rajapaksa last Saturday (July 6) said that after the last time he spoke at the Securities & Exchange Commission’s (SEC’s) “investment day” seminar resulted in the SEC Board resigning the first working day of the week, ie on Monday (July when the bourse opened for trading after Rajapaksa’s speech, saw it falling sharply, with the ASPI declining by 0.87% over its previous day’s (Friday, July 5) close to 5,995.64 points, while the newly introduced S&P Sri Lanka 20 Index fell more sharply, ie by 0.94% to 3,351.49 points on a modest Rs. 413.7 million turnover.
And the decline continued the following day Tuesday (July 9) as well, made worse by the fact that it recorded its second lowest turnover for the year to date, a figure of Rs. 255.85 million, only to see this dubious record being broken on Wednesday (July 10), with the bourse establishing a Rs. 228.2 million turnover, its latest 2nd lowest turnover figure for the year to date.
Meanwhile market indices at Wednesday’s trading made pyrrhic gains, with the ASPI increasing by 0.60% to 6,016.05 points and the S&P SL 20 by 0.51% to 3,365.08 points. The bourse also recorded a negligible Rs. 8.1 million NFI on Wednesday, with some sources alleging that what is considered as foreign transactions at times are in actual fact transactions made by locals holding offshore accounts. Therefore those trades cannot be considered as bona fide foreign trades.
The market, which, last week, was in the habit of establishing dubious records, made yet another on Thursday (July 11), recording its third lowest turnover for the year to date, with a sum of Rs. 241.9 million, relegating the Rs. 254.3 million made on Tuesday (July 9) to 4th place.
On Thursday too market indices made some hollow gains on the indices, with the ASPI over the previous day Wednesday’s closing increasing by 0.77% to 6,062.38 points and the S&P SL 20 by 0.83% to 3,392.90 points.
The market, since peaking on May 23, has since seen the ASPI decline by 7.1%, the S&PSL 20 by 7.6% and market capitalization (shareholder wealth) by Rs. 176.3 billion (7.1%) to Rs. 2,315.4 billion.
Reasons For Fall
Both external and internals factors may be attributed to the bourse’s “demise.”
Among those was that the bourse went up too quickly, or, more appropriately, why did it go up at all?
Despite the market’s recent fall, the ASPI since the beginning of the year to date has gained by 6.8%, the S&P SL 20 by 9.7% and market capitalization by 6.8%.
Another reason for the bourse’s “demise” may be pressure on rates. When interest rates go up, then investors would prefer to invest their money in the fixed income market rather than in the stock market.
Therefore it’s imperative for the authorities to rein in inflation, which is also a salve to the poor and which would also help to bring down rates.
The third reason, which may be attributed to the first is that with discouraging first quarterly earnings of corporates, coupled with April’s electricity hike, that too is likely to erode corporate earnings further, going forward (in the recently concluded 2nd quarter for instance).
The other reason is the Federal Reserve System’s decision to roll back its quantitative easing (QE) programme as there are signs that the US economy is recovering.
This pronouncement was made by Fed. Chairman Ben S. Bernanke on June 19 (U.S. time). Since then and up to Friday the market has witnessed a net foreign outflow (NFO) of Rs. 412.66 million, though, in the year to date it has had witnessed an NFI of Rs. 15.7 billion.
The rolling back of QE has sparked fears that that would lead to a liquidity crisis in the USA, resulting in a rise in interest rates there. This has also made foreign funds which have a mainly West (EU and USA) bent and which have invested in countries such as Sri Lanka, to exit from the same, probably to invest in other instruments in the US market, which is also their home market, due to improved economic forecasts emanating from the USA.
However on Wednesday (July 10), Bernanke speaking at a function in the USA seemingly reversed his June 19 stance saying that QE should continue due to poor jobs data coupled with low inflation in the US market. This latest statement resulted in the stabilisation of the local exchange rate (ER) in the foreign exchange market the following day Thursday.
Previously there was pressure for the ER to depreciate, though the rupee since the beginning of last month and up to now (July 12) having had depreciated by Rs. 4.40 (3.5%) in interbank spot trading, after having had closed at the beginning of June at the Rs. 126/50 price level, despite Bernanke’s Wednesday’s sweetener.
Further, the seeming benefits of Bernanake’s sudden about turn on Wednesday are yet to percolate down to the local stock market. Washington, DC is 10 hours behind Colombo.
Janus Seeks Exit
According to reports, Janus, which is mainly a US based fund, wants to exit at least part of its portfolio in blue chip JKH, the market’s highest capitalised stock, at the right price, it’s learnt.
Also, the exit of foreign funds following Bernanke’s previous speech has caused pressure to be borne on the rupee. A falling rupee is a disincentive to attract foreign portfolio investments.
As a result, NFIs which previously gave a thrust to the bourse, have since been reduced to a trickle, if not, having had begun exiting from the bourse.
To make matters worse, recently, Moody’s, an international credit rating agency, downgraded Sri Lanka’s external credit rating from B1 Positive to B1 Stable which is also no consolation to foreign funds wanting to invest in the bourse or in the government securities market or which have had already invested in both of those instruments, by having second thoughts about such investments due to this recent ratings downgrade.
Another reason for the “demise” of the bourse is the fall in gold prices. A number of Sri Lankan banks have a sizeable asset portfolio which comprises pawning assets, mainly in gold. So when gold prices fall, the value of those assets also fall, that in turn may tempt the debtor to default on such loans, causing a rise in banks’ bad debts, thereby making such stocks unpalatable to investments.
And the last reason for the bourse going through a rough patch is the resignation of the Colombo Stock Exchange’s (CSE’s) CEO Surekha Sellahewa who has given notice that she will be quitting the CSE with effect from November.
Sellahewa is known to be a woman of integrity. Her resignation comes in the backdrop of recent revelations in The Sunday Leader that certain key players in the Colombo stock market were allegedly holding offshore accounts in tax havens and the other reason, recent new appointments to the CSE directorate.
While one of those whose name was exposed in this article told this reporter that he had worked abroad and as such was entitled to hold such an account, having had also got Central Bank of Sri Lanka’s clearance in regard to the same, another whose name was also on that list, denied operating such an account. Having offshore accounts per se is not illegal, provided prior approval has been obtained from the authorities to operate such accounts.