Distance helps with objectivity. In the case of the local stock market it may also help to keep your money as far away for as long as possible. A public market, whose purpose is for the fair price discovery of assets and overseen by an independent authrity with full powers to prosecute offenders has ceased to exist. Instead retail investors now have to decide who amongst the mushrooming broker industry is politically connected to the Executive branch, which will determine both the return on and of your capital.
Buying and selling shares of publicly traded companies in the country no longer qualifies as investing, instead it is now officially a speculative Ponzi scheme. And small scale retail investors will be left to foot the bill of this disaster in a few years’ time. Fundamentals have pointed to overvaluation of domestic shares for at least the past 18 months. With the added regulatory risks, even bargains need to be ignored by investors who value the safety of their capital. This column has criticised some of the moves by the regulator on grounds of rationality, but to completely forestall the important guardian of retail investors, instead of encouraging criminal prosecution of insider trading has clearly sent the message that investors are irrelevant when compared to “other interests”.
The broker community whose entire survival depends on turnover (that is buying and selling of shares) does not have a fiduciary duty of care towards investors. Neither do the laws of the country force them to “act in the best interest” of clients. Sales practices that would be considered criminal in most countries have passed as “best practice” within the broader community. My general view on brokers is that if they were half as clever and twice as sensible, they would be four times more useful.
That the President sided with this bunch, instead of backing the regulator to pursue criminal charges against insider trading suggests that wrong advice on the operation of the market has been fed to him (alternatively and equally valid is the view that insider traders are also politically connected). There is a misguided notion, probably driven by the events of the last two years that stocks can only go up and its fine to bet the house on that outcome. Unfortunately if markets only went in one direction, what purpose would an army of analysts and brokers play in determining prices? If markets have been arranged to be a one way payoff, all one has to do is load up on leverage and buy everything without any due care for prices or prospective risk analysis. This is a fanciful view of investment markets. As realistic practitioners know fully well, bear markets occur once every four years and real returns can remain elusive for decades.
The most obvious reason for the government’s action is probably the over-exposure government agencies and the two large pension funds currently have to the stock market. It is fair to assume that the government is betting the house on market returns to service and plug budget black-holes and liability shortfalls. The desperation seems to be driven by their grand pursuit of economic growth and stability whilst facing international pressure on governance. Matters are made worse by high impact corruption, which denies the state of effective tax and revenue collection.
Investors who have the lowest understanding of various market moods are about to be sacrificed in a high stakes game turbo charged by artificially low interest rates to dissuade savers from parking money in a bank account. The fog of the journey is perhaps less important than the destination: high road or low road, we are on the way to high inflation with low – eye–wateringly low – interest rates. It’s the insight of Swedish economist Knut Wicksell, over a century ago, who articulated its determining principles.
Wicksell was the man who observed that there is an interest–rate level which keeps borrowers and lenders in balance. Tilt interest rates up; the savers love it, the borrowers hate it: and of course, vice versa. He went on to observe that if interest rates are kept constantly below the happy medium – which he described as the natural rate of interest – it starts to change the way a society behaves. Many savers become discouraged, and become either spenders or investors, depending on their temperament. Indeed it might be unclear which dynamic it is. So it is that the tenor of a society can be changed. According to Wicksell, this process has a momentum that cannot be checked, and if interest rates stay too low indefinitely, asset prices will rise to infinity. This reduction was intended to highlight the unreality of such a world.
With public markets temporarily shut down for “investing” (it is the open season for mind numbing speculation), it is time for serious investors to take a break and re-evaluate their portfolios once a strong regulator is put in place. If you have never invested in the stock market before and were considering stepping in now, don’t expect your capital back, let alone any returns. Sri Lanka’s well-wishers breathed a collective sigh of relief on November 12 when the Gold Coast got the poison chalice of the Commonwealth Games (a victory for Hambantota would have ruined three future generations). It seems that we are yet to pass the airless valley on our ascendency as a nation after 30 years of suffering. There is a few more miles to go from the current falling-at-the-seams-thugocracy to well regulated democracy.
(Kajanga is an Investment Specialist based in Sydney, Australia. You can write to him at kajangak@gmail.com). |
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