Despite the exceptional performance by the Colombo Stock Exchange (CSE) in 2009, CSE Chairman Nihal Fonseka said there are issues facing the market that could hold it back from moving to the next level to make its mark among regional markets in a sustainable manner.
In the 2009 Annual Report, Mr. Fonseka said it is necessary to bear in mind that due to poor liquidity, market velocity of the CSE is very low compared with other regional markets. High transaction costs, a small investor base, poor investor education, high level of broker risk, lack of new listings and insufficient attention to practicing good corporate governance are some of the factors that impinge on the development and expansion of the market.
However, Mr. Fonseka said that the CSE was the world’s second best performing market in terms of the rise in indices to historically high levels, highest ever market capitalization surpassing Rs.1 trillion for the first time and the highest ever annual turnover.
Another noteworthy factor was that the achievements of the CSE were driven by domestic investors with foreign investors being net sellers (about US$7 million) for the first time in eight years mainly due to the global unwinding of investments by a foreign fund towards the end of 2009. However, Mr. Fonseka said that at the end of 2009, foreign share ownership still represented 21% of market capitalization, marginally lower than the share at the end of 2008 but well above the proportions at the end of the previous three years.
According to the Annual Report, the All Share Price Index (ASPI) and the Milanka Price Index (MPI) recorded the highest ever annual increase of 125% and 136% and closed at 3,385.6 and 3,849.4 points respectively.
The CSE achieved the highest turnover for a given year of Rs.142.5 billion in 2009, surpassing the previous record of Rs.114.6 billion generated in 2005. The average daily turnover for the year increased to Rs..593.6 million.
Trading volumes were high during the year, resulting in 4.76 billion shares being traded. A total of 1.27 million transactions took place at the CSE, setting another new record for the Exchange, the Annual Report stated. The number of transactions in a single day of trading also reached a milestone in 2009 when 15,290 trades were executed on 18 June 2009.
The Annual Report stated that the low liquidity in the market is an issue besetting the Exchange. The CSE’s turnover velocity (Annual Turnover/average Market Cap, for the year) of the CSE in 2009 was 18% which is very low in comparison with other exchanges in the region.
The Report said the low liquidity will be addressed by increasing the active investor base, increasing the number of listed companies with a large capitalization and adequate public float, improving market micro structures and introducing more asset classes for trading.
The Annual Report further stated that with the optimism over the end of the civil war, the outlook for the country and the capital market is very positive despite large budget deficits weighed down by construction costs. With the global economy in recovery mode and with higher domestic and foreign investment growth opportunities, the Report said it is the responsibility of the policy makers to ensure a framework of policies that would be conducive to investment and economic development viewed from a long term perspective.