Wobbling value

The once high flying Colombo stock market has been struggling of late with over Rs. 244 billion in value wiped off since 1 October  a development which has drawn mixed reactions.On 1 October when the market peaked to its highest graduating from Asia’s best to world’s best performing the market capitalisation was Rs. 2.35 trillion, up 116% year to date then.

The benchmark All Share Price Index (ASPI) was up 111%.

However by Friday last week the market capitalisation was struggling at Rs. 2.11 trillion, down by Rs. 244 billion whilst the ASPI has dipped by over 10%. The market remains fragile despite a pro-business Budget presented by President Mahinda Rajapaksa last week. Despite the dip, the year to return offered by Colombo bourse is a high 88.5%.Independent analysts welcome the dip which they described as a “correction” from the market’s artificially high level in October. They opined that further correction was warranted with some tipping the ASPI to settle down to between 5,000 or 5,500 point level. Though this means a further loss of billions of rupees, they pointed out that in comparison to end 2009 level, the forecast 5,500-point level would still mean up over 60%.

It was noted that market settling down to 5,500 point-level would lend more sensibility and maturity paving for a fresh round of Bull run thereafter.

“The more serious and long-term investors continue to see opportunity in fundamentally strong stocks as well as post IPO stocks. In fact we are likely to see the latter becoming a class of their own offering real value,” these observers noted.

However brokers and some investors pin the market’s struggle to over regulation. They said though measures by the Securities and Exchange Commission (SEC) were aimed at bringing order of late there has been chaos and heartburn among even the more seasoned investors.

They alleged that the continuity of the price band mechanism along with extremely market-unfriendly 15 day period as well as new credit rules continue to dampen investor sentiment. “What keeps a market alive is both fundamentals and speculation.  A market cannot become dynamic sans the speculative element. The SEC has been too obsessed thereby over-regulating the market,” a broker alleged.

“In the recent past there was unnecessary fears created by reference to market as casino and one that is ridden with manipulation.  These led to several regulations killing the spirit of the market as well as driving away new and prospective investors,” an investor opined adding “Active play by retailers and day traders is essential and some of the new rules have succeeded in keeping them out of the market.”

Meanwhile brokers were confident of a return in improved investor sentiment.

“Activity in the latest counter listed reflects that investors are keen to participate in the market. Relaxation in forex regulations will also expand the market base in future. With refunds from the IPOs flowing in we expect improved buying interest in fundamentally strong counters,” Acuity Stockbrokers said.

 “Despite strong interest in the diversified and banking sector counters subsequent to the unveil of the budget for fiscal year 2011, the bourse continued to trend downwards during the week,” Asia Securities noted.  It said that healthy improvements with the market P/E moving from 25.0X to 20.0X, Colombo is elevating itself to be an attractive frontier market.

“With the market earnings edging nearly 36.6% QoQ, we see immense value and growth in most of the sectors. Hence, we advice our learned investors to capitalize on attractively low priced counters which are fundamentally strong with sustainable growth potential despite the upcoming credit settlement regulation,” Asia Securities said.