Sri Lanka’s tiny stock exchange is losing billions of rupees in value creation and becoming illiquid due to speculative attacks and an unrealistic boom, a stock market expert said.
The country has lost around Rs. 1.5 trillion in terms of value creation to the economy solely as result of those who manipulated the market from 6,000 to 7,800 points (ASP index), he added, attributing his argument to a comprehensive analysis of past events.
He warned that unless some action is taken to re-establish confidence of investors and regulate trading with the intervention of the President, no one can prevent the deterioration in the market.
Outlining his in-depth analysis on the series of events that took place in the Colombo stock market, he said that the drama began in mid-2009 just before the war ended with the All Share Price Index (ASPI) running at 1,500 points and a market capitalization of Rs. 1 trillion approximately.
He noted that the impact of the war victory was immediately seen with the market creating wealth and realizing wealth that was suppressed during the over 30 year war.
After two years in February 2011, the ASPI shot up to 7800 points, a market capitalization of Rs.2.3 trillion and an average turnover of Rs. 2.3 billion, he added. At 7,800, the market didn’t look healthy with unrealistic ‘Price Earning’ levels. Company share prices were highly inflated mainly as a result of mid cap stocks by a few net worth investors, he disclosed.
This was a highly unrealistic situation created by manipulators, he said, adding that they identified mid cap stocks with a very low public float for their sinister move. The modus operandi was that they obtained free unlimited credit for the small investors that gave liquidity to them and drove prices up to very unrealistic levels. After that they exited leaving the stocks in the hands of the small investor who borrowed money for these schemes thus making the Colombo stock market an inefficient one. The high daily turnover was a result of this, he said.
Then the regulator Securities and Exchange Commission stopped unregulated credit to protect small investors. As a result small investors have now been driven away from the market as they have lost more than they had as a result of credit.
The market crashed due to prices tumbling down as a result of manipulation with credit and force selling.
With the impact of the war victories, the market should have risen to only a realistic 6,000 points and not a manipulated unrealistic 7,800 points.
If the market settled at 6,000 points in February 2011 at a realistic growth of around 25 per cent, the indices would have reached 9,000 points and resulted in a healthy market cap of over Rs.3.5 trillion now, he concluded.