Financial Times

Colombo stock market trading soars

But is the bourse running too fast?
By Natasha Gunaratne

Capital market road shows in Singapore and other Asian countries will start next month in a move designed to attract foreign investment into Colombo’s thriving stock market. Market capitalization surpassed Rs.1 trillion this week and has posted impressive results over the past several weeks. Director General of the Securities and Exchange Commission (SEC) Channa De Silva said the road show in Singapore is scheduled for November 26 with the CEO’s of broking companies.

More than 20 funds come in
A host of foreign funds have invested in the Colombo share market since the war ended in May while there are many more wanting to come, according to stock analysts.

“Funds such as Levitt, Batterymarch, Rogers and many others have invested in the share market. The latest is Leopard Capital LP, a private equity firm that now manages a fund in Cambodia, which said that it intends to launch a new fund, Leopard Sri Lanka Fund LP in early 2010 to help mid-market firms expand in the domestic market as well as into other ‘frontier economies’,” an analyst said.

He said many stock broking firms are also into high gear promoting their firms in a more peaceful Sri Lanka to investors while blue chip firms are readying themselves to promote their firms abroad.

“We have also invited local companies to be a part of the road show.” He added that Singapore will be the first stop. Mr. De Silva said the SEC has advised the Colombo Stock Exchange (CSE) on opening a branch in Jaffna, in reasonable time, in addition to the four other branches in Matara, Kurunegala, Kandy and Negombo. Trincomalee has also asked for a branch.

Mr. De Silva said the market has room to grow. “This is still a local driven rally. However, we see a net foreign inflow of around Rs.500 million so I think fresh asset allocations which will come in 2010 will be made in the month of November.” He added that Sri Lanka has a price to earnings (P/E) ratio of 15 now whereas it was 7 around six months ago. In comparison, Singapore, India and Malaysia have P/E ratios of 20, 21 and 23 respectively. “A P/E at 15 will encourage companies to come and get a good valuation and it will also encourage investors to come,” he said.

Mr. De Silva added that despite market capitalization being around US$10 billion, liquidity needs to be increased. The free floats of companies which have not been encouraging have to increase to bring large companies into the market, he said. Lending rates are also still very high which makes the stock market more attraction.

Managing Director of Aitken Spence PLC Rajan Brito said the performance of the stock market is sustainable in the short term and shows confidence in the country, mainly for foreign investors. He said a lot of interest has been shown from foreign fund managers. The only restricting factors are that the market is very small and liquidity is a problem but Mr. Brito said the markets need more time to improve on those fronts. He added that in terms of a recovery from the global financial crisis, a lot more matters need to be resolved worldwide.

However despite the impressive results this week owing to local retail investors and high net worth investors, stock brokers are asking the question: Has the market run up ahead far too quickly? Brokers said that there have been no foreign funds over the last few weeks. “Foreigners have been net sellers over the past few weeks,” one broker said. “Local investors have been the single cause for the market to go up. Part of the reason is the end of the war but a big contribution is from the reduction in interest rates,” he said.

The broker explained that much has been said about the end of the war including expectations that tourism will recover, earnings will pick up and interest rates will fall. “That is all true but there are 230 companies in the stock market and not everyone will benefit to the same degree. There are also some companies that have absolutely no fundamental reason to go up.”

The broker explained that Sri Lanka falls short in terms of liquidity is extremely important when it come to foreigners searching for investment opportunities. Sri Lanka’s market capitalization in US$9 billion compared to a country like Bangladesh which has a market capitalization of US$15 billion.

The broker said what is more important is ascertaining the free float adjusted market capitalization. He said it is tiny because a lot of big companies in Sri Lanka have substantial foreign holdings. “The free float adjusted market capitalization is particularly important for foreigners because they want to buy shares where they can come in and go out quickly without impacting the market price.”

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