Bourse set for fresh burst; ASI likely to erase YTD negative return this week

The unprecedented sentiments-driven bull run has propelled the Colombo Bourse from Asia’s worst performer to the best within the past month with a 22% return, with some expecting the rally to enjoy a fresh burst this week as well, though this time around on fundamentals.

The Colombo stock market recorded one of the highest weekly gains in recent times, with the ASI up 7.8%, thereby reducing its year-to-date negative return to 2.4%. The nature of the rally, especially in latter part of last week institutional and foreign investors joining, has encouraged most to predict that ASI will turn year-to-date positive this week.

Given the year-to-date lowest point of the ASI in early June when the negative return was 22%, last week’s closing was remarkable. Market capitalisation has zoomed by Rs. 464 billion between 6 June and last week, and of this, Rs. 399 billion had been since the 20 July Presidential forum with capital market stakeholders.

Some have flagged off the rebound as fake or artificial as it was sentiments-driven.

 The latter, however, is a feature of any market, whilst given the level to which PER had dropped by July, most agreed, even before the changes at regulator level, that the market was attractive on fundamentals.

At least one fund manager, Ceybank Unit Trust’s CEO Chithra Sathkumara, believes that based on fundamentals, foreign, and new investor demand, the ASI will rise to 6,500 points in the coming weeks and thereafter settle down at 6,200 levels. Last week, the ASI was at 5,926.90.

The more liquid Milanka Index has already turned positive, closing last week up 6.87%.

The rebound was entirely triggered by retailers who flooded the market following upbeat sentiments with the change of regime at the Securities and Exchange Commission. This phenomenon is likely to make the Government happy because bringing back retailers along with a revival was a key stated objective by both President and Finance Minister Mahinda Rajapaksa and Finance Secretary Dr. P.B. Jayasundera during their interactions with capital market stakeholders.

Another breakthrough for the Government and the market was the continuing foreign inflow so far despite some sceptics and critics of the Government initially rushing to warn that political interference and regulatory changes will drive away foreign investors. Last week the inflow strengthened to Rs. 800 million, bringing the year-to-date figure to an all-time high of Rs. 29.6 billion.

After retailers showed the way especially for institutional investors, the Bourse has seen active play by all segments of the market, which has made the rebound credible.

Leaving regulatory change aside, when the market turned bearish, almost all brokers recommended that time was opportune to start buying, especially the fundamentally sound stocks. What the market lacked was sentiments.

With investors back in the market with improved sentiments, the Bourse has staged a significant rally. Several brokers who have their recommended basket of stocks have reported their price levels have reached stated levels or overshot those, prompting a re-rating.

Despite this phenomenon, several brokers said there still exists a host of buying opportunities on fundamentals.