Rising costs could rein in stocks
Robust buying by local retail investors who
have overtaken foreigners in driving the Colombo bourse for the
first time is likely to sustain the stock market at current record
levels but brokers warn that rising inflation fuelled by skyrocketing
oil prices could hurt corporate profits in the months ahead.
trading by local retail investors is now providing the longed-for
depth that foreigners, who previously dominated the market, had
complained was lacking in the Colombo bourse. An increasing flow
of funds from the outstations is also fuelling the boom.
widespread buying interest from local investors who have become
very resilient," declared Channa Amaratunga of Asia Capital.
Colombo Stock Exchange (CSE) Director General Hiran Mendis said
that unlike the early 1990s when foreign investors mainly drove
the market, they now contribute only 20 percent of the market turnover.
the South Asian crisis, foreign interest in emerging markets in
this part of the world waned and many foreign investors pulled their
funds out of these markets," he told The Sunday Times FT, adding
this flight of capital from South Asian markets greatly affected
Sri Lanka. However, the past few years have seen the local investor
showed a revival in the market and from then up to now we have experienced
positive growth rates in excess of 30 percent per annum," Mendis
said. He said that earlier one of the main complaints of foreign
investors was that the local market was not strong. "Earlier
the balance was tilted towards the foreign investors, but it has
changed now," he added.
local investments will add liquidity and help sustain the market.
Asanga Seneviratne, Managing Director, Asia Securities and head
of the Stock Brokers Association, told The Sunday Times FT that
future market expectations depend heavily on the budget next month.
"Currently there is a lot of negativity in the air about the
proposed taxes like the wealth tax which will push the market down,"
he said, adding if the government doesn't have any such surprises,
the All Share Price Index (ASPI) will reach the 1700 range. He predicted
that overall, the ASPI will be in the range of 1450 to 1550 in coming
investors have kept the market going mainly because the tourism
sector has taken off very well," he said, adding these investors
can sustain the market. Hotels had become the best performing sector
in the stock market and seemed to be isolated from macro-economic
problems facing the rest of the country as their income is in dollars,
said Shafi Waheed of DFCC Stockbrokers. "The hotels deserve
it as well after having gone through such a lean period," he
said. "We're just seeing the beginning of a huge boom in tourism,
if peace prevails. Hotels are expanding and increasing room capacities
and refurbishing their properties. They are at the threshold of
a better period."
whether the hotels sector had become overheated, Waheed said: "The
whole sector has to get re-rated. There's a little more time for
it to get overheated."
boom will last until the industry gets saturated when the number
of arrivals exceed available rooms as the infrastructure is not
enough to cater to the sudden influx of tourists.
sector would continue to grow and face a crunch situation at the
end of 2005 due to a lack of sufficient hotel rooms if the cease-fire
agreement prevails," SC Securities said in a market report.
it warned, "the only negative factor for the industry in the
short-term would be profits not improving in real terms due to the
depreciating rupee and escalating local operational costs."
how rising costs could affect hotel profits, Waheed said; "They'll
probably be able to recover their costs. Most hotels have increased
room rates by 10-15 percent as they couldn't cope with the demand.
Also, the average spend of tourists has gone up."
now there are no tourist seasons anymore. The influx of Indian visitors
helps fill hotels during the traditional off-season. However, listed
firms in other sectors may not fare so well. Amaratunga of Asia
Capital expects macro-economic conditions to get worse, particularly
expect to see steep rises in inflation in the last three months.
This will impact on corporate profitability. Not every firm can
pass on higher costs to consumers. The more monopolistic firms can
do so but not others. Also, employees will demand higher wages and
utility costs will rise further which will erode corporate profits.
will see a slow down in profits but robust local buying interest
is likely to sustain the market unless the economy really deteriorates."
While local investors have taken a dominant role in the stock market,
foreign funds have been guarded because of the macro-economic risks
associated with delays in the peace talks, rising inflation and
pressures on the government budget. "Foreign institutional
investors have been very quiet in the past year," said Amaratunga.
"They take a top-down approach when analysing investments.
Country factors such as the political and macro-economic situation
must be positive before they look at individual companies. So most
long term investors have second thoughts about the market."
local investors are not so concerned and many have a trading mentality,
chasing 'penny stocks', which in absolute terms are cheap and on
which they can make trading profits. Brokers said the renewed buying
interest by local retail investors was partly because of speculation
and partly ignorance, with the more discerning investors being selective
in picking stocks.
get informed investors who know the risks but are willing to speculate
in order to make trading profits. But some are actually trading
through ignorance - they do not know what the valuation multiples
are," said a broker.
by local retail investors comes in phases. The 'land phase', where
investors chased property stocks, is over and now they are going
after hotel stocks. "Undoubtedly tourism is one sector you
want to be in but that does not mean every hotel in the market will
do well," said Amaratunga. "Some will not make money,
some are burdened with tremendous amounts of debt, some price:earnings
ratios are quite high and can't be justified." Investors in
Kandy and Matara are making a growing contribution to market turnover.
and bigger amounts are coming from the outstations," said Amaratunga.