Last year (2010) saw a number of all time records being created by the Colombo Stock Exchange (CSE) in key equity market indicators such as the All Share Price Index, the Milanka Price Index, annual turnover, annual transactions, number of trades in a single day and market capitalisation, according to CSE Chairman Nihal Fonseka, whose comments appeared in the organisation's most recent, 2010 annual report.
He also noted that the market's price to earnings ratio at end-2010 was 25.2 times, said to be amongst the highest in the region, further commenting that the "effect of making the market less attractive to foreigners who were net sellers to the tune of Rs. 26.3 billion but in absolute terms foreign investor related market turnover also reached an all time high of Rs. 106.0 billion surpassing the previous high of Rs. 60.0 billion in 2008."
Mr. Fonseka however stated that "domestic investors have firmly established themselves as the dominant investor segment, thereby increasing the depth of the market. The increase in the number of depository accounts and the more than five-fold increase to Rs. 168.0 million, being 7% compared to 5% in 2009, in the average daily turnover contribution in 2010 from the five CSE branches outside Colombo including the new Jaffna Branch in the Northern Province are manifestations of increasing domestic investor interest."
On the other hand, he cautioned that the "contribution to total turnover from domestic individual investors at about 44% appears high in comparison to many other markets" and that there were "clear signs that the speculative component of retail trades was reaching unhealthy levels fuelled by the herd mentality of small investors and excessive credit provided by stockbrokers and financial intermediaries including banks."
Mr. Fonseka also commented that the "relatively high level of retail trading by individuals can also lead to unhealthy volatility and it is hoped that, as in other markets, mutual funds will expand and become the preferred vehicle for retail investments n the stock market and that the proportion of trading by institutional investors will increase in time to come."
He also reiterated that a large and liquid corporate debt market was "essential" and opined that the "situation in Sri Lanka is in stark contrast to other markets where the value of listed debt is significantly higher, sometimes being twice or thrice the value of the equity markets. From a national perspective, over dependence on the banking system for credit is not desirable." He also recommended "making listed corporate debt with maturities over three years exempt from withholding tax and to collect the tax revenue applicable to interest income through alternative enforcement mechanisms."
Meanwhile, according to CSE Chief Executive Surekha Sellahewa, "81.0% of turnover was generated by domestic investors, a considerable portion of which is prone to short-term trading strategies." She also noted that there was "considerable compulsion to actively promote high quality listings because as a frontier market, size and liquidity continue to be concerns which downplay Sri Lanka’s competitiveness in relation to the more developed emerging markets."
She also revealed that turnover velocity, or the measure of the level of the market's liquidity, a key target for the CSE, second only to the number of listings, grew to 34.5%, higher than the 25% hoped for, due to the eight initial public offerings (IPOs) which garnered Rs. 4.3 billion in new equity. This was also compared to a significantly less impressive showing in 2009 where there were only two new listings, which raised Rs. 0.7 billion. |
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