No bulls but retail play persists

Despite a lingering bearish market since the all time peak in mid-February, there hasn’t been an exodus by retailers, who however remain hopeful of a bull run.

Retailers who do deals below Rs. 200,000 per day have remained active, accounting for on average 6% of the day’s trading between December 2010 and end March this year. Their peak however had been over 10% in mid March this year and lowest of 2%, according to industry data obtained by the Daily FT.

This revelation should dismiss the theory adduced by some brokers and analysts that retailers have exited the market either due to poor prospects or tighter regulation such as formalisation of credit facilities.

However, analysts said the market certainly lacked the buoyancy and confidence level that it enjoyed during the peak of the bull run up to February.

The Colombo Stock Exchange’s (CSE) benchmark ASI’s peak was 7,812 points, achieved on 2011 Valentine’s Day, 14 February. The index was at 7,319 points on Friday, which reflects a 6.3% decline. However, the year to date gain of ASI is 10.3%.

In comparison to 17.7% year to date on 14 February, the current number reflects a 7.4 basis points dip and a 42% decline.

In terms of market capitalisation, the 14 February peak was Rs. 2,600 billion whilst by Friday it had dipped by Rs. 126 billion or 4.8% to Rs. 2,474 billion.

If one discounts the fact that by mid-February prices of certain stocks were artificially high, then the current status could be more realistic or attractive.

For the latter, analysts point to the market’s price earnings ratio, which on Friday was 26.10 times lower against 29.53 times on 14 February. This reflects that the market is currently attractive for investors. Fifteen months ago i.e. in February 2010, the market’s PER was 18 times whilst market capitalisation was only Rs. 1.19 trillion.

With regard to prospects for this week, brokers remained mixed.

“We expect the market to consolidate in the weeks ahead backed by the positive earnings growth reported by most listed entities,” said Acuity Stockbrokers.

Asia Wealth Management said activities last week continued to descend, as local investors did not show signs of interest confirming their loss of motivation. This in turn scaled down the daily turnovers, although volumes survived on the penny stocks.

“The novel trading rules and 100% debt clearance scheduled in June are presumably keeping away investors and preventing them from taking active positions in the market,” Asia Wealth added.

It said the foreign buying side becoming stronger last week, giving a net foreign inflow, would persuade local investors to reappear to their customary activities at the Colombo bourse. However, Asia Wealth said that although slender recovery was seen towards the latter stage of the week, it cannot be firm on this week’s market upturn as the investors’ cautiousness could still hold strong.

Independent analysts were of the view that resurfacing of complaints over credit rules could be due to the approach of June deadline to settle the remainder 50% outstanding of clients. (See box story)

A closer scrutiny of retailer activity during December 2010 and March 2011 is that it was low in the months leading up to the market peak month of February. In that period it was the high net worth and institutional investors who were active in the market. But herein too such activity by high net worth investors was in the final stage of exhausting their funds as some had been parked in various private placements in preceding months.

Unofficial estimates put about Rs. 20 billion locked up in private placements since January 2010. In addition to 10 new issues last year, there were three more IPOs as well as in the first quarter, which sapped liquidity of retailers whilst stretching the capacity of high net worth investors.

Apart from primary issues, the bourse had also seen multiple Rights Issues. The biggest IPO so far this year, Rs. 2.4 billion of Expolanka currently open for subscription, is likely to further make funds for secondary market investments scarce.

However in March retail activity had picked up, whilst at least two broking firms expanded their reach to tap more. DNH Financial opened a branch in Negombo whilst Asia Securities opened in Wennapuwa.

 

More time to settle debtors?

Broking firms and investors are hopeful that the Securities and Exchange Commission (SEC) will consider providing extra time to clear the remainder of debts among clients.

The original deadline for 100% clearance is 30 June, but expectations are high for a final extension on the grounds that 50% had been cleared by 31 March, thereby considerably reducing the systemic risk, if any. The industry is recommending 25% settlement by June and the remaining 25% by September.

The SEC in September last year ruled clearance of debt by January 2011, whilst in November it softened its stance by ruling that brokers should reduce their debtors positions at least by 50% by 31 March 2011 and by 100% latest by 30 June 2011.

The last revision was made by the commission as a consideration of granting the small time investors additional time to clear their current outstanding positions, consequent to representations made by the Colombo Stock Brokers Association and certain other market participants to the SEC.