Bourse hails broker credit boost

The Colombo stock market erupted yesterday before and after the SEC lifted the ban on broker credit to clients establishing one of the biggest day gains with value of Bourse rising by Rs. 77 billion.

The benchmark All Share Index (ASI) shot up by 3.13% or 214 points and Milanka Price Index rose sharply by 3.67%. Yesterday’s ASI rebound propelled Colombo to become world’s seventh best performing market in addition to being Asia’s second best with a year to date return of 6.25%.

A momentous day was rounded up with a welcome net foreign inflow as well.

As exclusively reported by the Daily FT, the Securities and Exchange Commission (SEC) announced its decision with immediate effect to let stock broking firms to lend to their clients over T+3 based on the computation of Liquid Assets less Obligations, maintaining a leverage at zero level. See table on page 2 for the basis of computation. SEC also mandated Licensed Stock Brokers to reconcile daily positions taken against the Liquid Assets by such Licensed Stock Broker and to submit on a monthly basis a declaration to the SEC and CSE confirming the position of Liquid Assets less Obligations as it stands at the end of each month; the declaration to be submitted within 2 market days after the end of each month.

The SEC said it took cognisance of the improving stability in the capital market together with the concerns expressed by the Colombo Stock Brokers Association and retail investors and decided to relax the said restriction subject to prudential requirements.

                      

SEC said at a special Commission meeting on Monday it reviewed the restriction imposed on Stock Brokers in extending credit to investors and has decided to relax the said restriction subject to certain prudential requirements being met by the Licensed Stock Brokers, in order to facilitate retail investors to have access to credit by such Licensed Stock Brokers.

Even before the SEC announcement made just after 1 p.m. the market in anticipation had been on the rise with pent up buying returning.

The SEC’s support was widely welcomed though it meant softening its earlier tough or rigid stance which however was to bring in greater discipline.

Analysts said that nearly 90% of the active market is dominated by retailers who have a portfolio of Rs. 1 million and below. The separate margin provision arrangement to be undertaken by a dedicated unit following the ban of broker credit, had resulted in only around 2,000 margin accounts opened. Since it was expensive and only sought by high networth investors most retailers shunned margin trading. This was adduced as a key reason for the market’s down fall though some believed the dip was part of a much desired correction.

The new liquid capital requirement however doesn’t empower all 28 brokers to lend to their clients. The Daily FT learns around 10 brokers fail in the new criteria imposed by the SEC. This means the respective brokers will have to top up capital via liquid instruments to lend to clients. New rules in that context will encourage most broking firms to opt for greater recapitalisation which in turn will improve the overall strength.

Leading brokers linked yesterday’s rebound to relaxed credit rules.

“The SEC’s new directive relaxing rules prohibiting brokers from extending credit to investors was met with relief by retail investors,” Asia Wealth Management CEO Subri Marikkar said. “The stock market reacted positively today to the news of being granted a little more leverage,” he added.

“The indices rebounded strongly owing to the relaxation of credit by the SEC,” said John Keells Stock Brokers.

“Investors reacted aggressively to the announcement made by the SEC regarding an allowance for credit over T+3 days. A bullish sentiment was witnessed across the board with high activity,” said NDB Stockbrokers.

“The market rebounded heavily to the positive zone today triggered by the favorable reply received from the Securities and Exchange Commission regarding the credit issue. ASI reached 7000 milestone with this notable boom in the market,” said Lanka Securities.

 “Market kicked off with a positive start on the back of investors’ expectations on the Regulatory finalising their decision on credit rules. The bullish momentum stabilised with the official disclosure by SEC in the afternoon, proving to be favourably in line with investors’ expectations,” noted Arrenga Capital. “Subsequently, ASPI registered a sturdy gain of 214.21 points to close at a 5 week high of 7,050.74 points. Hence returning to its 7,000 levels after 20 June 2011. The 200+ point gain was registered after a lapse of 6 months with an across the board investor participation,” it added.

SC Securities chipped in saying “Market ascended in an energetic manner subsequent to the Securities Exchange Commission’s directive regarding credit relaxation.”

Turnover was bolstered by retailers though yet again chasing speculative stocks to a large degree.

Land & Property was the main contributor to the market turnover (due to Colombo Land & Development), and the sector index increased by 7.75%. The share price of Colombo Land & Development increased by Rs. 6.30 (14.75%) and closed at Rs. 52.50.

Healthcare sector also contributed significantly to the market turnover (due to The Lanka Hospital Corporation) and the sector index increased by 22.93%. The Lanka Hospital Corporation was the main contributor to the market turnover. The share price increased by Rs.31.40 (59.58%) and closed at Rs. 89.50.

Both the voting and non-voting of Laugfs Gas were seen picking up pace as they registered 5.67% and 5.48% gain respectively.

Renewed interest witnessed in John Keells Holdings as well other market heavyweights such as Carson’s Bukit, Commercial Bank helped indices gain.

“With the regain of investor confidence, many players initiated to look at counters which had reported healthy earnings during 1QFY12. Heavy weights; Bukit Darah along with its subsidiary Carsons Cumberbatch, were among the such picks. Both the counters appreciated by 6.82% and 6.78% respectively,” Arrenga Capital said.

DNH Financial said market turnover rose to Rs.3.8 bn with Lanka Hospitals, John Keells Holdings and Colombo Land collectively accounting for 37% of the day’s total. Gains were across the board with Lanka hospitals, People’s Finance, Dolphin Hotel rising by 59.6%, 22.2% and 20.7% smoothening out losses in Lanka Ashok, Union Chemicals and Hayleys MGT which declined by 16.4%, 10.6% and 7.7%.

Lanka Securities said foreign participation stood at 8.3% of the total market activity and at the end of the day foreign investors were the net buyers with a net foreign inflow of Rs.138.6mn.

Thus far in 2011, they have sold Rs. 9.96 billion, and in 2010, had sold a record Rs. 26.4

billion.     Reuters quoted unnamed brokers as saying foreign funds were snapping up market heavyweight and top conglomerate John Keells Holdings, on hopes of future development and expansions.