Bourse bleeds

An apparent rise in greed could best explain the current performance of the Colombo bourse, which has lost Rs. 163 billion in value since the peak of mid-February.

From a year-to-date return of 17.7% on 14 February, the benchmark ASI on Tuesday closed with a 6.74% year to date gain. Market capitalisation on 2011 Valentine’s Day was Rs. 2,600 billion and this week it had slumped by 6.2% to Rs. 2,437 billion.

In effect the rate of growth of the ASI had dipped by 62% between mid-February and this week whilst on percentage point basis it is 11. Despite the dip, Colombo remains Asia’s best performer.

On Tuesday signs of the free-fall were more evident with the ASI dipping around 1.4% to a three month low and market cap dipped by Rs. 36 billion from Monday. Unless bargain hunters return or overall investor sentiments improve, the bourse is likely to remain bearish.

Whilst ups and downs are natural in any markets, what has caused concern among independent analysts with regard to the Colombo bourse is some retailers blindly or based on flimsy speculation chasing after what brokers describe as “junk stocks”. “Some new investors keen on quick returns have invested heavily in several fundamentally-unsound shares, purely on rumours. Many of the newcomers had bought such stocks on the rise as seasoned traders who actually trigger the perceived bull run, resulting in retailers following a herd, exit booking profits,” analysts claimed.

Another said the slightly mature investors had also followed the herd and in search of trading returns from these junk stocks, some of them had been dumping the more fundamental stocks which had gain lower. A fund manager said those with poor holding power had been selling at a loss to improve personal liquidity or get more margin facility.

Some of these characteristics help to better understand the current dilemma at the Colombo bourse. The more fundamentally-sound stocks which have released outstanding results and have attractive price earnings ratios aren’t being sought after, but the low priced and junk stocks are pursued instead. Other analysts said that impressive results had been previously factored in investor valuations, hence no major gains following blue chip results announcements.

Those who play the market aggressively argued that as far as trading was concerned none could blame the focus on low value as well as junk stocks because they were also an integral part of the equities market and every stock, be it blue chip or otherwise, carried its own level of risk. It was also pointed out if not for the growing community of day traders and speculators the bourse in recent weeks would have been dead.

Independent analysts cautioned that play on speculative stocks was fine as long as investors were well aware of the risks and provided they had deep pockets and holding power.

The multitude of IPOs and private placements locking a substantial amount of funds was another reason cited by analysts. The past one month saw two mega issues – the Rs. 2.4 billion of Expolanka and Rs. 4 billion of Softlogic – with each raising Rs. 11.5 billion and Rs. 17 billion respectively.

New listing aspirant Access Engineering last week raised Rs. 4.5 billion via a private placement whilst several existing companies have raised billions via Rights as well since early this year. At present there are two IPOs (Vallibel One and Browns Investments) though small in value – both worth Rs. 783 million – and investors are likely to clamour for something in a smaller pie.

The plethora of options in the market (apart from limits in bank guarantees and other concerns) could be a reason why big ticket IPOs such as Exploanka and Softlogic didn’t see massive oversubscription. A top investor noted that the mindset of some investors appeared to be that it was better to focus on long-listed companies which have a proven track record and attractive price earnings ratio as opposed to future forecast ones.

Some viewed the dip in the bourse from mid-February peak as a continuation of the welcome correction, whilst they also felt that current valuations are still high, which had kept most of the foreign funds away, apart from liquidity issues. 

Premier blue chip JKH however has seen a spate of foreign buying since last week.

The market’s price earnings ratio in mid-February was 29.5 times whilst on Tuesday it was 24 times.