Margin mayhem!

• Forced and panic selling wipes off a further Rs. 46 b in value, bringing total in two days to Rs. 90 b
• Bourse suffers biggest single day drop in recent months; year-to-date dip of ASI nears 9%, MPI at 10%

Call it margin mayhem, warranted freefall of highly-inflated penny stocks or even sheer loss of confidence, the Colombo stock market has all of it as it suffered the biggest day fall in recent months with Rs. 90 billion in value wiped off in just two days.

Mid-day the ASI plunged by 211 points, but recovered thereafter to finish with a decline of 127 points or 2.24%. The Milanka Index shed 101 points (peak was 158 points dip) or 2%. The end result was the negative return of the Colombo Bourse (Asia’s worst performer) eroding further with the ASI down 8.86% and MPI by 9.9% year-to-date. The ASI closed at its lowest level since 18 August 2010.

Reuters said the ASI fell into the oversold region with the Relative Strength Index at 21.164, well below the lower neutral range of 30.

Loss of market capitalisation yesterday was Rs. 46 billion, on top of Rs. 44 billion on Monday.

Brokers and analysts linked the dip to forced selling on account of margin calls, whilst others opined that the market was finding the true values of penny and speculative stocks, hence the losses were welcome. Some pinned the worsening negative run on lack of investor confidence despite macro fundamentals remaining strong.

Reuters also  said retail traders sold shares en masse to settle month-end margin calls.

The market has been sliding throughout January, shrugging off an expansion of credit available to investors, propelled down by fears of rising interest rates, a currency crisis and a regulatory probe into share manipulation.

The market has fallen 6.6 per cent since 17 January, the day after the Securities and Exchange Commission (SEC) allowed brokers to extend more credit to clients. It has not proven the medicine for the bourse that some brokerages had forecast.

Conglomerate John Keells Holdings PLC closed at Rs. 160, losing 2.44 per cent, despite foreign purchases totalling 1.07 million shares. Retail favourite Environmental Resources Investment PLC fell 5% to Rs. 27.

The day’s turnover was Rs. 1.28 billion ($ 11.23 million), far below last year’s average of 2.3 billion. Volume was 76.5 million shares. Last year’s daily average was a record 102.7 million.

Foreign investors were net buyers of Rs. 179.2 million worth of shares, but they have sold 185 million so far this year after 19.1 billion in 2011.

Arrenga Capital said the ASI crossing below the 5,500 support level mid-day with junk being on the front of the loser’s list created a sense of panic among the investor community, hence the sell-out.

“It was clearly noticeable that the majority of the losses were being made in the speculative picks, as most of them now have reached back to their real values, creating hefty unrealised losses on portfolios which still hold them,” Arrenga said.

Speculative chase continued in Swarnamahal Financial Services, as the counter managed to gain by 14.4% at its close of Rs. 113.9, amidst heavy fall in indices. Retail favourite, Asia Asset Finance, also managed to close in the green following some volatility. The counter fluctuated between Rs. 5.6 to Rs. 6.2, before closing at Rs. 6.1 with a 3.4% gain.

Citrus Leisure and Colombo Land & Developments also gathered considerable interest led by retail participants, as both appeared among the day’s top turnover list.

Adding further, several steady counters including Central Finance, Expolanka Holdings, Vallibel One, Tokyo Cement [Non-Voting], Softlogic Holdings, Sampath Bank, Dialog Axiata, Diesel & Motor Engineering, Hatton National Bank [Non-Voting], DFCC Bank, Richard Pieris, LB Finance and People’s Leasing Company traded on their 52-week low.