Crisis in the stock market

Thursday, 1 December 2011 00:00 -     - {{hitsCtrl.values.hits}}

Since the stock market is crashing, the brokers have run to the President to salvage it. In the West when the stock market crashes, the industry sorts it out. They do not run to Obama or Cameron or Sarkozy or Merkel.

The brokers in this country are a selfish lot who are only interested in boosting their profits and individual commissions.

They have made some unrealistic proposals to the President:

1. That banks increase their lending on equities trading from 5% of net assets to 7.5%.

No regulator can force a bank on how to lend and where to lend. But seeing that most banks are controlled by the Government, this could happen.

In developed countries people invest their savings in equities. By borrowing you are punting. The whole crisis in the CSE was due to equity investments being made on borrowed funds. The brokers want to go back to this.

2. They want the State funds to invest more.

Are they inviting the EPF to buy up more companies and nominate directors with dubious backgrounds to their boards?

3. They want the State to subsidise 50% of their cost of opening new branches.

Haven’t they made enough money to bear the cost themselves? Why should the taxpayer bear this?

To boost investor confidence, all the President has to do is:

1. Revoke the Expropriation Bill.

2. Re-establish the independence of the Judiciary and the Attorney General’s Department.

3. Revoke the 18th Amendment and appoint independent Police, Public Service and Judicial Service Commissions.

4. Give more teeth to the Bribery Commission.

5. Bring back the Rule of Law in this country.

6. Release all political prisoners.

7. Bring about a solution to the ethnic issue.

8. Ensure media freedom and lift the blocking of websites critical of the Government.

These steps are more likely to revive the stock market than by giving instructions to banks and regulators.

The CSE is so volatile that a mere meeting with the President pushes the indices up even though only a hearing was given and nothing has been agreed upon despite media hype.

Actually the CSE has performed extremely well when you take the rise in indices from an ASPI of 1,500 in May 2009 to 6,000 today – just 30 months later. The problem is that it went up too fast and reached 7,000 last year and then dropped. Everyday cannot be Christmas for brokers and investors.

The Singapore road show had about 50% participation by the CSE delegation and 50% by investors. Not as bad as St. Kitts. Our Ambassador’s speech had no substance. No reasons were given as to what Sri Lanka has to offer or why investors should invest. My good friend the Governor gave his usual brilliant presentation – all sunshine stories about Sri Lanka’s potential.

When questioned on the Expropriation Bill, he said that the Government was only taking back Government assets which were not utilised for the purpose they had been privatised.

What investors need is a climate conducive to investment in this country. This includes respect for human rights and a vibrant democracy. The CSE should grow on the backs of fundamentally-sound stocks to attract local savers and foreign investors and not be a casino for fundamentally-unsound stocks which are manipulated by a few.

A stock market realist