Bourse struggles despite good Budget, boost for capital market

The Colombo Bourse is struggling as local investors appear to be unimpressed by the widely-welcomed 2013 Budget and specific boost for the capital market.

Since the presentation of what was generally considered a “development-oriented” Budget by most chambers of commerce and specifically hailed by capital market stakeholders on 8 November, the stock market has lost over 1% or over Rs. 21 billion in value.

The dip may appear minimal, but what has caused concern among market analysts is the lack of local – retail and institutional – investor participation or their less-than-bullish sentiments.

Average turnover has been below par. Last week SEC officials pointed to past performance to emphasise that November and December months have been relatively subdued annually.

However, given the degree of commendation of Budget 2013 as well as it containing seven capital market specific proposals, the investor response has been disappointing, according to analysts.



“Either the market doesn’t believe in the Budget or investor sentiments have been dampened by other factors such upward pressure on interest rates and lack of confidence overall on macro situation and governance,” some analysts claimed.

The investors’ negative reaction is also of concern to analysts given the surprising rebound in corporate earnings in September. Investors also failed to take heart from the fact that the Central Bank kept policy rates unchanged for the seventh consecutive month.

Some, however, said most active investors who dominate trading were dried up, whilst most others were on the sidelines or opting for fixed income options. This is despite capital markets repeatedly emphasising the Bourse has provided better returns overtime than Treasury Bills.

However, the failure of the market to respond positively to Budget 2013 was highlighted by several brokers last week.

Asia Wealth Management headlined its weekly report as ‘Post-Budget Hype diminishes,’ whilst Softlogic Stockbrokers said ‘Budget fails to restore Bourse’.

“The Colombo Bourse failed to carry forward the last week’s positive sentiments over the Budget proposals despite it is being highly appreciated by investor community, including the Colombo Stock Brokers Association (CSBA),” Asia Wealth said.

“The first week following the reading of the Government’s Budget proposal for 2013 has been marked by various stakeholders of the capital markets, including private corporations and stockbrokers, expressing their contentment over the Budget proposals, while lauding the consistency maintained in the policy directives. The Government’s agenda for the capital market was focussed on further democratising the market by increasing overall investor activity through the promotion of financial instruments such as unit trusts, new equity issues, and corporate debt. Further, in response to the above, the regulatory authorities, the CSE and the SEC, came together to share a common goal in line with the policy direction outlined in the Budget proposals,” Asia said.

“Despite these positive developments, the Budget proposals for 2013 appear to have failed to galvanise investor activity and bring about a turnaround in the equities market, which apart from several large transactions on specific counters, continues to witness lacklustre volumes and turnover levels. However, investor participation maybe partly limited due to continuing investor fears over governance and transparency issues of the regulatory authorities,” the broking firm opined.

“Further, the prevailing high interest rate environment which offers attractive rates on fixed income instruments proves to be a challenge in persuading retail investors to shift back to equities. This is evident by the fact that despite the strong earnings recorded during the 3QCY12 by a number of counters in the banking and diversified sectors, a marked improvement in investor activity has not been witnessed,” Asia Wealth said.

Softlogic Stockbrokers said: “Despite the Budget focusing on the long-term benefits of the capital markets, the stock market reaction was limited. Instead stocks lost 33 points since the Budget (last week), crashing the hopes of many of another bull run.”

It also said the much-awaited budgetary announcement and the flow of positive earnings announcements by the listed companies “did little to restore the local investor spirits as they preferred to adopt a ‘wait-and-see’ approach”. In contrast the foreign investor community remained with the confident play in the Sri Lankan stocks, Softlogic added.

Given this scenario, the broking firm said it did not expect much participation to occur in the upcoming weeks as many have settled in a holiday mood with the festive season approaching.

“We opine the active players to make use of the present dry up so as to capitalise on other weakness in hoarding as much as you can at this point. Hoarding at this point would mean that you hold on for a reasonable time period to enjoy the gains when the market turns around,” Softlogic said.