Sri Lanka's stock market is still comparatively over-priced despite coming off record highs that made it Asia's best performing bourse after the end of the island's ethnic war, an analyst said.
"I can't help but wonder whether the peace dividend has resulted in the market being over priced and whether it is a bubble waiting to burst," said Ravi Abeysuriya, chief executive of Heraymila Securities. "No market can give earnings like this."
The Colombo Stock Exchange's price-to-earnings multiple has come down to 19 times after the regulator, the Securities and Exchange Commission (SEC), restricted buying on credit and imposed price bands to curb volatility, he said.
The emerging market index for markets like India, China and Brazil, as now 13 times while the frontier market PE ratio was 10 times, Abeysuriya, a former SEC commissioner, told the 8th LBR LBO CFO FORUM Tuesday.
It was held on the theme 'CSE: A Blood Bath or a Gold Mine' at the Ceylon Continental Hotel attended by a large gathering of corporate executives.
"Timely action by the SEC prevented a blood bath like in Bangladesh," Abeysuriya said.
"But Sri Lanka stills stands out at a PE of 19 times. So our market is still relatively over-priced," he said.
"In the medium to long term I believe Sri Lanka can become a gold mine because we see robust company earnings and higher growth."
The island's strategic location next to India, seen as a key growth centre in Asia, to which economic activity is shifting, is also an advantage.
"We know there's a shift in wealth to the East. Like what Hong Kong is to China, Sri Lanka can become the gateway to India. We are located strategically - we have an advantage."
Other countries that recovered from lengthy civil wars also showed high growth rates, Abeysuriya said, noting that Sri Lanka has potential to generate double-digit growth because of strong growth even during the ethnic war.
The number of firms listed on the stock exchange will also grow with many companies, including government-owned ones, making use of the bourse to raise funds.
"More savers will consider the CSE because bank savings accounts now give very low returns."
But Abeysuriya said the CSE needs reforms and development.
"There's a need to promote investor confidence with ethical practices that instil public trust in the market," Abeysuriya said. "We need robust regulatory standards to protect investors and advocate fair play.
"Some of the policy changes that we will see soon such as the stipulated minimum public float as a continuing listing requirement, which will generate more liquidity, will prevent a lot of the current malpractices now happening because of the lack of liquidity," he said.
Amendments to the Securities and Exchange Commission law will also bring in civil sanctions for those who artificially manipulate the stock market.
The changes will facilitate growth of institutional investors like unit trusts or mutual funds, Abeysuriya said.