Cheaper CSE to be cheerful with credit

The chorus for  ‘relaxed credit rule is critical for capital market’ is echoing greater in Colombo Bourse with hopes firmly set on a probable meeting of SEC Commissioners this week.

“The stock market certainly needs relaxed credit rules for a more emphatic rebound and a boost of confidence,” analysts said.

Industry estimates that around 80% of the market is currently dominated by retailers whose share portfolio is below Rs. 500,000 and given the fact that this category of investors have been the livewire of the CSE since this year the Commissioners of the Securities and Exchange Commission (SEC) have to give due recognition and support to written proposals put forwarded by Colombo Stock Brokers’ Association.

It was also pointed out that margin providers leveraging up to four times which was also regulated by the SEC mainly caters to high networth investors. Retailers were left with little or no leeway and brokers triggering force selling after T+5. This had aggravated the slide of the market.

There was much hope over Commissioner’s making a favourable decision during their last week’s meeting but for want of more facts and information a final ruling was deferred.

           

This disappointed the Bourse which dipped by 0.7% on Thursday after a late rally Wednesday. However the Bourse closed on the up on Friday.

“Colombo (Bourse) is cheaper but isn’t cheerful because of brokers not being allowed to lend their own capital to clients with fairly good safeguards and systems in place,” a senior broker told the Daily FT.

Since an all time high Rs. 2,600 billion (Rs. 2.6 trillion) market capitalisation in mid-February, the CSE’s value had plunged to Rs. 2,449 billion, whilst ASPI which was at a peak of 17.7% year to date return on 14 February, has by Friday last week provided a return of only 3%. MPI continues to languish with negative return of 12%. From the 2011’s peak, ASI has dropped by 12.5% or 978 points. The MPI has dropped sharply by 1433 points or 19.5%.

Analysts said that CSBA proposals were fair though a few brokers are comfortable operating in the current status quo hence the latter have said credit rules shouldn’t be relaxed.

Analysts said that credit based on net capital and perhaps addition of liquid capital as a safeguard will improve the overall financial strength of broking firms.

CSBA have two options to SEC. One was zero time leveraging and one time leveraging on their net capital. The consensus has since narrowed it to the first.

Last week the market was highly volatile. It finished the week with the ASI gaining 82 points and MPI by 34 points.

Asia Wealth Management said the main contributor for the week was the property sector which appreciated 97 points during the week. It said SEC with its Wednesday’s announcement to postpone the final decision to the subsequent week on relaxing the credit rules, created heavy unrest especially among the retail calibre. “This compelled them to select the property sector in order to pursue on another speculative rally to make a quick gain,” it added.

Asia also pointed to the fact that year to date net foreign outflow expanded to Rs. 9.88 billion highlighting a negative foreign investor sentiment on the bourse.

“Nevertheless, macro fundamentals are robust; Moody’s sovereign rating moving from stable to positive; 6.25% Dollar bond oversubscribed by 7.5 times; Bourse currently trades at trailing PE of 17.9x; Hence as mentioned in a prior week, with a 40% minimum earnings expectations the forward PE is expected to be 12.9x,” Asia Wealth said.

The broker also said that even if SEC relaxes on credit rules, it is solemnly advising investors to confine to trade on cash and abide by the T+5 rule. “This prevents a future credit bubble, hence not witnessing lengthy bearish periods,” Asia Wealth opined.

Acuity Stockbrokers said that the market’s see-sawed over the week as regulators deferred the much anticipated decision on the broker credit-easing rule. Bourse gains over the week were driven mainly by retail investors, with Land & Property stocks in particular seeing a slight run on speculative trading.

“Markets closed the week on a positive note as retail sentiment improved in anticipation of a final decision over the relaxation of margin buying rules by early next week,” Acuity said in its report for the week.

“Strong corporate earnings are likely to continue flooding in over the course of the upcoming week. However, the outcome of the SEC’s decision on credit easing is likely to dominate sentiment and overshadow the thus far strong corporate earnings,” Acuity added.

Whilst consensus is growing for relaxed credit rule, independent analysts opine that the more robust way forward for Colombo Bourse was greater participation of institutional investors, both foreign and local.

“Supportive credit rules will help in the short to medium term but CSE needs greater play by institutions who are unfortunately mysteriously remain inactive and the few in the market are actually behaving like retailers which is a shame,” analyst lamented.

Despite post-war Sri Lanka increasingly improving its profile as a sound economy with great prospects analysts also were disappointed that the CSE wasn’t promoting Colombo aggressively overseas. “Ideally CSE should have done roadshows from early this year and had it happened investors exiting from other volatile markets as evident from last month, would have identified Colombo as a better option.  It is not too late to market Colombo as global markets will remain fragile whereas Sri Lanka story is far better and credible,” they added.

Colombo in late July lost its long held position as Asia’s best performer as by week ended 22 July ASI produced a negative 1.5% year to date return. On Tuesday it regained lost status and closed the week as Asia’s number two. In 2009 and 2010 it was world’s second best performer clearing establishing itself as world’s most consistent.