Financial Times

Big deals and wise investments
The billion-rupee deals that are taking place on the stock market, like the acquisition by John Keells of a controlling stake in Asian Hotels, and the initiative taken by local investors is indeed heartening and a sign the market is maturing, although it still has a long way to go in terms of size, liquidity and effective regulation. Size undoubtedly matters in the emerging globalised world of business. The acquisition of Asian Hotels means John Keells is getting bigger. We need bigger conglomerates to survive and compete in the globalised economy.

Market players consider it an encouraging sign that indices are appreciating on strong volumes and quite a bit of foreign participation. No doubt the black money that has come into circulation with the tax amnesty played some part in this raging bull run. But the involvement of both local retail investors and blue chip conglomerates indicates the growing confidence in the market underscored by strong economic fundamentals, both country and corporate, which are products of the peace dividend.

This renewed enthusiasm for stocks by investors big and small is all the more reason why there should be more vigorous efforts to ensure fairplay and transparency in the market, which was shocked by the unprecedented insider dealing scandal at the Securities and Exchange Commission. Although investors have been fired up by the fantastic corporate performances being reported there are still lingering doubts about the accuracy of some of these results.

Tales of doctored accounts and window-dressing to make them look better than they actually are continue to do the rounds, and keep reviving memories of scandals in more mature markets such as Enron in the US and even our own ones like the insider dealing fiasco at the market watchdog and the fraud at Pramuka. There is still a strong belief that this market is far from fair and that, given the incestuous nature of Colombo's small business community, there still is a lot of insider dealing and other irregularities taking place which market regulators are unable to catch.

It should not be forgotten that we still have among the Commissioners of the SEC those who seem to believe that 'eminent' people do no wrong and should not be investigated even when there is some suspicion of wrongdoing. Given the scandal that rocked the organisation and prompted the resignations of its two top officials the SEC surely needs to clear the air about such attitudes and possible conflicts of its commissioners. After all, this is a case where the Attorney General himself found fault with the Commissioners for trying to ignore his advice.

Another danger is that small-time investors with an inadequate knowledge of the market and of listed companies are likely to burn their fingers by making foolish investments driven by the herd instinct, while foreign investors, usually regarded as the more savvy, make profits at their expense. Brokers themselves have drawn attention to the "indiscriminate" buying by small investors. They have warned that in the stampede for shares investors are buying even stocks that are fundamentally weak such as hotels that are deep in the red.

In the past it has been noted that foreign investors and so-called high net worth locals tend to be better readers of market movements, either because of their sophistication and experience or inside knowledge, and have a better track record of buying low and selling high. The exuberance that is driving the bull run should not blind investors to the dangers inherent in any market, especially one that is as small as the CSE and in a country as volatile as ours.

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