Oh October!

October is special for the capital markets regulator as it is the birth month of the SEC, but the current slide at the Colombo bourse is threatening it to be the worst so far this year unless buying of bargains returns from retail and institutional investors.

Over a 1.4% dip yesterday brought the All Share Index just short of 24 points to be relegated to the lowest level this year. Today if the market falls even by half as it did yesterday (the ASPI dipped by 92 points to close at 6,458 points), then the CSE sinking to lowest level is a certainty. Lowest this year was 6,434 points experienced on 25 July.

The analysis is depressing, but that is the realty of the market causing mixed reactions – one of total dismay and another of relief over the bourse having come down to earth from its artificially dizzy highs. However even at such low level, Colombo is Asia’s fifth-best performer with a year-to-date loss of 2.7% after being on the top for most of 2011.                                         

Negative sentiments and lack of confidence or enthusiasm as well as few other issues saw the Colombo bourse lose Rs. 33 billion in value yesterday, bringing its total for the month so far to Rs. 116 billion and making it the worst half month so far. Year-to-date the worst month in terms of loss of value was June, which saw Rs. 181 billion wiped off.

Most analysts were of the view that with at least two more weeks remaining, unless investors take heart and return to the bourse on a buying mode, October could turn out to be the worst.

“The start of the week looked bleak as the ASPI closed 92 points lower. Margin calls escalated forced selling. Low liquidity levels kept the trading volumes at bay as retail investors continued to incur losses,” NDB Stockbrokers said. “However, a number of crossings helped the turnover,” it added.

The day’s negative closing however wasn’t after an early morning spike.

Arrenga Capital said the morning investor sprint led the ASPI to reach a high of 6,603.2 points (up 53.2 points) whilst the Milanka Index gained a solid 112.9 points at its intra-day high of 5,991.2 points, at around 9:40 a.m.

“But investor spirit subdued before noon when the benchmark index was seen gliding down with some selling pressure arising. With the speculative run losing flame, overall local participation has been stifled with most of the portfolios being stuck with the heavy losses made in those low profile counters,” it added.

SC Securities said the market continued to a descend further into the gloomy terrain with some investors taking up selling positions whilst others seemingly were adopting a wait-and-see approach, both evident by the dismal performance of the indices and lower turnovers.

Market turnover fell below Rs. 1 billion to record a three month low of Rs. 978 million. “The absence of high value block trades and a distinct reduction in retail participation which was a constant sight over the last few months resulted in the activity levels to remain low,” SC Securities added.

Though noting that it was a disappointing start, DNH Financial said its expectation of a sanguine outlook for 3Q2011 corporate earnings would continue to lend support to market valuations.

“As we move deeper into the 4Q, this should provide the necessary trigger for the bourse to gradually commence its re-rating process,” a seemingly never-say-die DNH said.

Ahead of this probability, DNH advised investors to start their bottom up stock selection process concentrating on stocks that have a robust business model focusing on domestic consumer demand.

“In this respect, we advise investors to focus on companies with largely monopolistic attributes and strong brand loyalty within sectors and sub-sectors that are both growth and resilient. We re-iterate the need to construct a diversified portfolio of mainly growth stocks that have strong top line revenue growth and sustainable margins and directly benefit from the domestic demand story,” DNH Financial added.

NDB Stockbrokers said diversified holdings sector was the main contributor to the market turnover (due to John Keells Holdings) and the sector index decreased by 0.66%. The share price of John Keells Holdings declined by Rs. 0.40 (0.2%) to close at Rs.199.70. 300,000 shares of JKH exchanged hands at a price of Rs. 200 and the foreign holding of JKH decreased by 100,675 shares.

Land and Property sector also contributed heavily to the market turnover (due to Infrastructure Developers) and the sector index decreased by 3.76%.The share price of Infrastructure Developers increased by Rs. 2.70 (9.82%) to close at Rs. 30.20.

Dialog Axiata was another significant contributor to the market turnover while the share price remained unchanged at Rs. 8. Regnis Lanka and Blue Diamond were active participants today. Regnis Lanka share price declined Rs. 3.10 (0.65%) to close at Rs. 471.50 while Blue Diamond share price increased Rs. 0.10 (1.11%) to close at Rs. 9.20.

Arrenga Capital said losers pack included Lanka Hospitals (-8.5%), Free Lanka Capital (-2.7%), Blue Diamonds (-7.1%), Blue Diamonds [Non-Voting] (-14.3%), Colombo Land & Developments (-10.5%), Panasian Power (-8.0%), Reunka Agri Foods (-3.9%), SMB Leasing (-7.7%), SMB Leasing [Non-Voting] (-12.5%), Regnis Lanka (-4.8%), Radiant Gems (-12.8%), Serendib Hotels (-7.6%), E-Channelling (-8.5%), HVA Foods (-17.4%) and Tess Agro (-12.7%).

It said most of the fundamentally-led counters such as Royal Ceramics, LB Finance, Commercial Bank, Vallibel One, Lanka Orix Leasing, Aitken Spence, National Development Bank, Colombo Dockyard, CIC [Non-Voting] and Aitken Spence Hotel Holdings, have now being spotted by Arrenga Research as attractively valued after touching their 52-week low yesterday.

Meanwhile European stocks hit a 10-week high on investors’ expectations to shore the Euro debt scene at EU Summit whilst the MSCI Emerging Markets Index rose 1.8%. The MSCI Asia Pacific Index rose 0.8% marking a 5.4% gain over the last five trading days whilst S&P 500 Index also climbed up 0.6%.

European markets continued their third week brisk recovery rally as investors looked back at equities with expectations on the upcoming EU Summit. Investor confidence regained after the finance chiefs endorsed parts of the plan to halt the crisis.

Blue Chip Euro Stoxx 600 advanced 1.2%, climbing over 50% retracement of the slump over the last few months. Taking into account the gap between the market capitalisations and shareholders’ equity, advisors believe that this relief run will not be over soon. Valuations still remain low at 4Q Trailing PER of 8.3X – Euro Stoxx 600 index.