Stock market zooms but bubble could burst

A stock market analyst said that what is happening in the market at present is ‘strange’ at best and the few transactions that gave strength to the market are what they are – a few transactions only.

The stock market has been jubilant during the past week with strategic buys into lucrative companies by both foreign and local investors, but some industry analysts feel this is ‘completely abnormal’ and it’s only a matter of time, before the buble will burst.

“GoldQuest’s Rs.1 billion sales proceeds of National development Bank (NDB) which they used to buy John Keells Holdings (JKH) was driving the market up. Also State Street, a fund with a few other foreign funds have bought Rs.2 billion worth of Dialog GSM shares, which was sold to them by another foreign fund. Raj Rajaratnam’s buy of Rs.1.2 billion worth of DFCC stock also drove the market and all these transactions are just one-off,” he explained.

He said that despite these transactions giving strength to the market, the bubble will burst any moment. “The exchange rates are unstable, interest rates are rising and there is a huge war situation. This will not last long,” he said, adding that the market is overpriced at present. About the US based Calpers Fund buying into Dialog Telekom, he said that this is because, a war or peace situation will not affect a telecommunication company. “Dialog is poised to grow anyway. This fund has looked at the company because it has strong growth fundamentals,” he said.

However other analysts beg to differ. “Despite the negative situations, especially on the peace front, the investors are not concerned. They want to get into the market to beat inflation,” an analyst said.

Rajive Dissanayake, Manager Research, HNB Stockbrokers Private Limited said that the market has picked up faster than it fell after the failed peace talks last month. “This is due to good profits shown by the blue chip corporate and also fuelled by strategic interest by some investors in NDB, JKH and Asiri Surgical,” he added.

The Colombo Stock Exchange (CSE) created history last Thursday with its main price index, the All Share Price Index (ASPI), reaching its highest ever point at 2,558.1 points, surpassing its previous record of 2,551.4 points recorded on 16th November 2005. The Milanka Price Index opened at 3,276.5 and closed at 3,330.1 moving up by 53.6 points. At the close of trading, the market capitalisation of the CSE surpassed all previous levels to reach an all time high of Rs.785.8 billion. The previous record was Rs.772.8 billion recorded on 16th November 2005. Foreign investors are net buyers in the market, with net purchases of Rs.4168 million so far for this year. Looking at these figures, a market analyst said that it seems that investors have come to terms with the violence. “The common thinking among investors is that despite peace talks failing, it will not take another 20 years to solve the ethnic issue, because of ‘sheer necessity’ for both parties a for a solution.

With the height of the war, Sri Lanka has been posting over five percent growth and if the country can average five percent, many feel that with peace it can average around 10 percent,” he said, adding that healthy corporate earnings also contributed to this positive thinking.

He said factoring all of these, the investors are taking firm positions now, because they do not want to be too late.

A stock broker said that the ‘downside’ to macro economic landscape is limited and the stock market is booming, because the investment potential is high. “The war is not factored in the present scenario and foreign investment and funds are coming in. There are a lot of infrastructure projects happening, which will trickle down to the bottom lines. Also there is a hope that the UNP will support the budget,” he said.

When asked about the boom of the CSE, he said that this is a ‘short term phenomena.’ “It is only an incident that happened and not a big economic indicator for a small economy like ours. This could be true for economics such as Japan, Singapore or Malaysia, because most people there are connected to the stock market,” he added.

Bandula Gunawardena, UNP parliamentarian and economist, said that the CSE is a way out for people holding black money. “I feel that 50 percent of the Sri Lankan economy is black, because the majority of people have an undeclared income source. Otherwise, with economic crises that we have many people should die,” he said.

Meanwhile, taking a closer look at the large transactions, an industry analyst said that GoldQuest may just be trying to make inroads into JKH as it is the only company which has no clear controlling shareholder. “GoldQuest has deep pockets and a lot of money. JKH has no controlling shareholder and this is an interesting aspect for a company like GoldQuest, because they seen to want to buy ‘big’ companies, as was the case with NDB,” he said.

A stockbroker echoing this sentiment said that GoldQuest is definitely looking at becoming a top shareholder at JKH.

“They may only have around four percent, but there is a possibility that they can work together with a company,” he said, adding that JKH is a good target for a raid, because of the ‘low control’ situation in the conglomerate. “It looks as if GoldQuest is going after JKH. The price of the JKH stock has risen, because many investors buy the stock thinking that there will be a hostile takeover, he explained, adding that this immediately rushes its price up. However he said that currently the stock is not worth the trading price, but the stock’s long-term prospects are high.

However some see it differently. An analyst said there is good reason for JKH stock to shoot up in price, because the company is getting closer to the lucrative South Port project. “By January they will be calling the tenders and the conglomerate's growth prospects are quite big. The investors who are aware of this may have bought the stocks due to these reasons,” he said.

C T Smith Stockbrokers (Pvt) Limited has also confirmed this by saying that the conglomerate is currently going through an expansion phase, which will facilitate above average earnings growth in the medium term.

“The increased investments in the leisure sector, particularly outside Sri Lanka, the probable development of three more container terminals at the Colombo Port by SAGT and property development are expected to provide significant impetus for sustained earnings growth,” the company’s report has said, adding that amidst the lack of a controlling shareholder, which entices take over interest, “we believe that at current valuations the stock is likely to outperform the market and most peers.”