Financial Times

Colombo stocks gyrate to political beat
The roller-coaster ride on the Colombo bourse continued last week with Norway's pullout of the peace process triggering panic selling that brought prices crashing down on Friday.

Brokers said the market would remain volatile until the political uncertainty ends while analysts said share prices, which had shot up too high, too fast with speculators playing with borrowed money, had now come down to more realistic levels.

They warned that the uncertainty, if prolonged, could damage the economy and that a cohabitation arrangement, with both the president and prime minister sharing power, was essential in negotiating the country's future with a terrorist group as ruthless as the LTTE.

"The market is highly sensitive to rumours and day-to-day political developments," said Angelo Ranasinghe of Bartleet Mallory Stockbrokers. "We see it as a temporary situation. It all depends on whether the president and prime minister can agree to work together, which would be a positive development."

Another election would spell "disaster" and set back much of the gains of the past two years. Hasitha Premaratne of HNB Stockbrokers said the market crashed as investors were unnerved by Norway's pullout of the peace process and speculation parliament would be dissolved and a snap poll held.

"The pullout by Norwegian facilitators could impact on the future of the peace process which investors took as a negative sign. Also, another election would have a negative impact on the overall economy." Other brokers said investors ignored fundamentals and reacted to political news, which affect share prices "by the hour" with even prices of firms reporting healthy profits not being spared in the meltdown.
Amal Sanderatne, CEO of Frontier Research, said it was optimism that resulted in an over valuation of the stock market.

"I think the market was over valued. The market was in an optimistic state of mind. Nothing in this country had essentially changed and we are still very vulnerable to external shocks. The risk premium had fallen and the expectation of growth had increased. We were expecting only good things to happen. This also reflects on the kind of investor that is in the market." Sanderatne said a lot of people were playing the market on borrowed money. "There was no credit control on the kind of credit people were getting. This has resulted in a lot of forced selling," he said, explaining the collapse of the market.

The All Share Price Index lost 88 points or seven percent on Friday to end the week at 1,167.32 while the Milanka plunged 169 points to 2,107.93 on a turnover of Rs 403 million.

The selling was largely by retail investors and a few high net-worth individuals with the big funds holding on to their portfolios. Friday's fall was across the board, with most major stocks, including blue chips, coming down. Ravi Abeysuriya, CEO of Fitch Ratings Lanka, said the uncertainty could delay disbursement of the $4.5 billion pledged by aid donors which would have helped to improve infrastructure, thereby stalling all new economic activity. "The expected multiplier impact will not happen."

Abeysuriya said that when the government creates uncertainty in the mind of the private sector, it cannot expect the private sector to generate economic growth. Asked about the rating Sri Lanka would receive, Abeysuriya said, "Sri Lanka's borrowing is about 103 percent of our Gross Domestic Product. The government was trying to reduce its over draft.

This makes it very difficult for Sri Lanka to borrow. At present India has a double B rating; Sri Lanka will be rated below this." Sanderatne of Frontier Research, commenting on the phenomenal movements in prices of blue chips, said: "There are liquidity problems in the market.

The blue chips can be sold and this is the reason for the fluctuation in their prices. The herd instinct plays a big role in our market. This means at one point either every one is trying to buy or everyone is selling."

A prolonged crisis would affect the long-term growth prospects of the economy. "Even though the stock market is a small part of the economy, the volatility in the market is not good and affects economic sentiment. While the effect on real economic out put is small, the crisis has had a significant effect on economic sentiment. If this situation continues for a longer period then it will definitely have a big impact on the economy, mostly with long term investments."

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