THE STOCK MARKET
Compiled by Savithri Rodrigo
Q: How is the bourse faring in the context of regional and global trends?
Tushan Wickramasinghe (TW): The Colombo bourse has been somewhat resilient to global trends. In the last three years, the Colombo Stock Exchange (CSE) underperformed in comparison with other Asian markets while being the second-best performing market in the world in 2010 and 2011 by generating a cumulative return in excess of 250 percent.
Ravi Abeysuriya (RA): It has provided a return of about 6.5 percent compared to regional and global indices, which enjoyed double digit returns over the last 12 months. However, Citibank frontier markets strategist Andrew Howell was recently quoted by the Wall Street Journal (WSJ) as saying: “We thought Sri Lanka was cheap but it turns out to be really cheap.” This endorsed Sri Lanka as one of the most attractive frontier markets.
Q: Where do you see the local stock market heading in the medium term?
TW Due to political uncertainty, there is no clear market direction and many investors are adopting a ‘wait and see’ approach.
RA We should witness positive momentum in the medium term with the implementation of the Capital Market Strategy 2020 as the new Securities and Exchange Commission (SEC) Act will offer market participants new products and the confidence to return to investing. There’s also the prospect of the sale of the government’s stake in the Grand Hyatt Colombo and Hilton Colombo through the CSE. And most importantly, once local institutional investors including the Employees’ Provident Fund (EPF), Employees’ Trust Fund (ETF), National Savings Bank (NSB), Sri Lanka Insurance and local high net worth investors return to the market.
Q: What more can be done to revive the bourse?
TW Stockbroking firms should not have to force sell clients who haven’t settled and not signed credit agreements every day provided that brokers have excess funds above the net capital requirement. Daily forced selling depresses prices continuously. It is also vital to introduce short selling so that investors can make money when share prices are declining, which can also revive turnover.
RA The key is to fast track the implementation of the Capital Market Strategy 2020 through inter-regulatory coordination with key stakeholders by the National Economic Council to formulate, coordinate and ensure implementation of economic policies, plans and programmes.
Q: What are the three main challenges facing the CSE?
TW High interest rates, inconsistent government policies and stockbroker rules not being revised to encourage stockbroking firms to grow their retail base for the market to have its critical mass.
RA Being a small market, the lack of liquidity or free float of listed shares; limited diversification of the product offering from an investor’s perspective and a dearth of listing platforms from an issuer’s perspective; and effective governance, enforcement and compliance based on international standards to create a level playing field that instils trust and confidence among varied market participants.
Q: Could you cite four initiatives that the CSE could take to boost the market?
TW Revise impractical rules and regulations, and enforce strict time bars; introduce derivatives; arrange more road shows to attract foreign investors; and pursue new listings of local and foreign companies.
RA Increase awareness about the CSE and its product offerings to appropriate investors; follow other markets where discount brokerages offer online trading for funded accounts at a much lower cost than full service brokerages; and improve the efficiency and cost effectiveness of the fundraising process, through operational and technological enhancements, and implementation of new listing platforms.
Q: How is the government’s fiscal policy affecting the bourse?
TW Increased corporate income tax rates negatively impact earnings attributable to equity shareholders while higher taxes on goods and services are also a negative because they affect aggregate demand – and this in turn reduces corporate earnings.
RA Large budget deficits negatively affected stock and bond prices as they resulted in higher interest rates. The slippage in the budget deficit also led to deficit financing by borrowing from the banking system and printing money. This has had an adverse impact on inflation and led to high interest rates on fixed income products such as fixed deposits.
Q: How much influence do stockbrokers have over the regulatory framework?
TW As far as we know, stockbrokers do not have an opportunity to be involved in formulating the regulatory framework.
RA Individual stockbrokers don’t have any influence over the regulatory framework. However, as part of stakeholder consultations, the SEC regularly obtains views of the Colombo Stock Brokers Association (CSBA). The government has implemented certain CSBA proposals during its budget formulation process.
Q: How about the advent of artificial market movements from time to time?
TW There are no artificial market movements unless there is a circular trading of parcels of shares. We’re not aware of any case where this has been proven in the past decade. Buying or selling a larger quantity of shares does not necessarily constitute an artificial market movement. There should be frequent moderate movements to entice retail and high net worth individuals to actively participate in the market.
RA Large artificial price movements particularly of illiquid stocks were common a few years ago but not in the recent past. The SEC has installed better surveillance systems, and provided its team with foreign training to detect such movements and take necessary action. Under the new SEC Act, false trading, and market rigging and manipulation are clearly defined so anyone who contravenes the act is liable. Upon conviction, a fine of not less than Rs. 10 million and/or imprisonment for a term not exceeding 10 years is applicable.
Q: To what extent do investors assess corporate ethics and governance when making investment decisions in this day and age?
TW There’s an emphasis on this. Investors prefer companies that are not controlled by one person through nominees directly and indirectly, thereby gaining the full benefit of their share of profits.
RA Investors in Sri Lanka hardly attribute a premium for corporates that demonstrate strong corporate ethics and governance best practices. Independent directors have become a mandatory element of the new corporate governance paradigm. Listed companies in Sri Lanka appoint independent board directors largely based on the close relationship an individual has with the management or majority shareholder rather than their independence, skills and knowledge.