Stock market and the economy

Monday, 17 January 2011 00:01 -     - {{hitsCtrl.values.hits}}

THE Securities and Exchange Commission (SEC) on Friday held its maiden stakeholders’ forum. It was over breakfast and given the abridged trading day on account of half day trading, the dialogue lasted for slightly over an hour.

Nevertheless, it was a welcome move by the capital markets regulator and as suggested by a participant, a monthly or a more regular forum will be useful.

Daily FT in pages 8 and 9 has the full coverage of the forum for a more detailed reading.

The Colombo stock market, for very good reasons, has been frequenting headlines in global financial press and other media outlets. It is by far the best performing stock market in the world for two consecutive years, whilst this year so far it is Asia’s best.

The “end of war” phenomenon has triggered a resurgence in the outlook for the economy as aptly demonstrated with high GDP growth and the sharp rise in corporate earnings. Improved macroeconomic fundamentals have also resulted in a lower interest rate regime. These two reasons have boosted the level of activity as well as the attractiveness of the Colombo stock market.

Given the 125% return offered in 2009 and 96% in 2010, investing in the stock market has become a growing trend. Over half a million accounts have been opened by last year, which is quite substantial, considering the very low figure a few years ago. Today politicians from the governing and opposition sides, public servants and armed services personnel are playing the market, in addition to a host of young people wanting to get rich quickly and senior citizens. As investing in savings and fixed deposit accounts yield lower returns, it is only understandable that more people are flocking to the stock market.

It was this surge and a few people being overly greedy and trying to cash-in that saw the market overheat mid last year, prompting some to describe it as a casino. In its own assessment, SEC felt a bubble and stepped in to avoid a probable burst.

With the economic growth forecast to be double digit in post-war Sri Lanka, a relatively low regime of interest rate and inflation as well as the attractiveness of capital markets as a means of raising funds, the stock market will expand further.

In the unprecedented wave of optimism and growth, all stakeholders in the capital market need to be pragmatic and dynamic. Investments, essentially, are an act of trust, whilst there is also an element of risk; the latter needs to be addressed, via greater investor education and good regulations. Thankfully, some of the actions of the SEC helped prevent a calamity of the likes of what Bangladesh faced recently after its stock exchange collapsed, resulting in violence.

To make capital markets more robust and attractive, all stakeholders need to engage themselves with a sense of trust to do what is right, responsibly. Personal prejudices, vested interests or maverick attitudes will not serve anybody. A more holistic approach as well as an inclusive process is critical.

It is widely known that despite the euphoria about the stock market boom, Colombo is tiny and the masses have no knowledge about it, nor do they actively participate in it. Thanks to post-war rebound, the numbers have increased, yet in global and regional standards the market is still nascent, whilst in a critical emerging markets terminology, Sri Lanka is yet to be captured on the radar of international fund managers.

Therefore, Sri Lanka has a long way to go. In that context, the three-year roadmap unveiled by the SEC is encouraging. Its strategic and broader goals are commendable, hence worth listing here. One is to facilitate improvements in the capital market infrastructure and the other is to facilitate improvements in liquidity and introduce new products in the capital market. The SEC also aims to encourage and facilitate the widening and broadening of both the issuer and investor base in addition to improving its own performance through effective alignment and management of human, information, and financial capital.

In going forward, the SEC has to strike a good balance of market regulation and development, since both have to go hand in hand without one being compromised for another. Post-war Sri Lanka can certainly realise the vision of a more dynamic and pervasive capital market for higher yet secure investments. For this genuine engagement of stakeholders, greater cooperation and mutual trust are paramount.