Riding the wave

An informative business chat, the second in a series organised by the Postgraduate Institute of Management Alumni (PIM Alumni) was held at the conference room of the Jaic Hilton on 16 March.

Titled ‘Riding the Wave: A Closer Look at the Sri Lankan Stock Market Performance,’ the chat was focused on discussing and assessing the current boom that is being experienced by the stock market.

The welcome address was made by PIM Alumni President Kemantha Perera, who warmly welcomed the participants and gave a brief introduction to PIM Alumni and its members. He added that today’s session will help people make informed decisions in the stock market.

Prof. Uditha Liyanage, Director of PIM, was next on the stand and spoke of how the institute functions in keeping up with the times.

“It’s about CI and CC; Continuous Improvement and Continuous Change,” he said, citing the work that has been done regarding the syllabi of the institute, which has been modelled after those offered by world famous colleges such a Harvard.

The key note speaker for the evening was Nihal Fonseka, Chairman of the Colombo Stock Exchange (CSE) and CEO of DFCC Bank. He began the address by giving a background to the current developments seen in the stock market, stating that Sri Lanka is one of the fastest growing markets in the world.

“We have garnered a lot of attention because we have had two years of stellar performance,” he said.

• Is the recent performance sustainable?
• Are the shares overvalued?
• What would happen if the market crashes?
• What are the guidelines for investment decisions?
• What is the role of the investor?

With regard to the first two points, Fonseka said that he could not give definitive answers but would outline the factors that were relevant. He started by looking at the past in order to get an idea on how the future could look.

Looking at a few statistics from before the end of the war, he described how in 2008, the global and local economy was going through a rough patch. Since the market started on a low base, resurgence was bound to happen, especially at the end of the long war.

However, he stated that the numbers of people who do trade are still relatively small. “There is huge potential for an untapped market since many more people can get involved.”

He added that we were still not a mature market despite the growth experienced in the past two years. Using statistics and comparing the Sri Lankan market to other regional markets, he drew attention to some of the key factors that will have a bearing on the sustainability of these trends. “At some point, a balance will be found,” he stated.

He added that though value would continue to be created on the CSE, it may not be experienced across the board.

In order to sustain this growth, Fonseka stated that factors such as greater investor participation, more products such as some types of simple derivatives, etc., to offer investors with alternative investment opportunities (currently we only have a cash securities market) and the ability to trade profitably even when the market moves down, increase market liquidity through the availability of more shares for trading, a sound regulatory framework with further emphasis on investor protection, good risk management and reducing some of the current inherent risks, reduction in transaction costs as CSE is one of the most expensive in the world to carry out a transaction and further improvements to market microstructure.

With regards to the effects of a market crash, such as the one that was experienced by Bangladesh due to regulation issues, Fonseka stated that markets can do two things, go up or go down.

“We don’t have major contagion factors that would affect the whole economy even if there is a temporary big market drop because the number of people who will lose cash as opposed to a reduction in wealth will be relatively small,” he said, adding that however in case there was a significant drop, some companies may be affected, since they may not be able to raise sufficient capital for expansion purposes if the appetite for equity drops.

However, he recalled that even during depressed market conditions some years ago fundamentally strong companies have raised significant amounts of new capital in our market.

Next, he looked at investors and their role within the market, giving them advice on how to make informed decisions. He advised that serious investors should have a medium term outlook and avoid a herd-mentality and make investments taking into account fundamentals, realistic growth prospects and good governance and also pay attention the regulations that surround the process.

Prudent asset allocation based on individual requirements such as income and capital growth was also a key part of making wise decisions but if the purpose is to make a quick buck, he explained that the procedure was different.

He stated that the role of the investor is to have constructive engagement with the management and support company growth by subscribing to capital increases when necessary.

He added that minority and majority shareholders need to work together with mutual respect. He ended his address by stating “it’s common sense, not rocket science” when it comes to prudently investing in the stock market with a medium term outlook.

At the conclusion of the key note address, it was the turn of the panel of experts to lead the discussion. The panel of experts was comprised of Malik Cader – Director General of the Security Exchange commission (SEC), Nihal Fonseka and Ray Abeywardane – CEO of Acuity Partners, moderated by Angelo Ranasinghe Alumni and Director of Bartleet Mallory Stockbrokers.

The panel began their discussion by talking about the directives that have been issued by the SEC. Cader spoke of how regulation, at times a hotly debated issue, is imperative in creating a level playing field and avoiding such situations as faced by Bangladesh.

“We looked at international best practices in order to protect the investors,” he said. He also explained the price band that is currently in effect on the market. “There was a credit bubble being created in the market and stock prices were way beyond the fundamentals. When the market was banded, this credit bubble was diffused.”

Regarding the accusations that have been made about these regulations interfering with supply and demand, Cader stated, “We respect supply and demand but we are opposed to an artificial supply and demand that is being created in the market.”

With regard to the time limit placed on the band he explained that it would be reviewed periodically and decisions will be made accordingly. “We need more sophistication in the market, and bring in more products because right now we only offer ‘vanilla,’” he concluded.

Adding to his final statement, Fonseka explained that people must understand the new products that being introduced and it should take things to the next level. “In the hands of the ignorant, it can be quite dangerous.”

The next query was directed at Abeywardane, which dealt with the large number of IPOs that are entering the market this year and the resulting changes in liquidity.

Abeywardane agreed that this would be a momentous year due to this number; however he stated that methods in which they will be absorbed into the market is very important since they can only handle a limited number at a time. “Overlapping must be avoided since it will be a strain on the investor so it needs to be phased out.”

Abeywardane stated that even though there seems to be a large number some of them are introductions, some are regulatory and other are very small offerings and that the necessary measures need to be taken by the investment banks.

The floor was then opened to the audience who were given an opportunity to speak to the panel about their queries and concerns.

PIM Alumni is dedicated to providing professional development programmes and raising topical issues in public interest programmes. Interested persons who wish to be registered for future programmes or have any inquiries may contact PIM Alumni through [email protected].