Capital market strategy 2016-2020 – small silver lining in the abyss of darkness
Capital market stakeholders have cautiously welcomed Prime Minister Ranil Wickremesinghe’s Capital Market Strategy 2016-2020 while expressing skepticism that it would actually work. The strategy proposing regulatory and development steps was recently approved by the Cabinet of Ministers. However many in the disappointed industry say that strategies to boost the local capital market have been discussed over and over again over the past decade followed by limited action and implementation.
"It’s just talk,” a stockbroker who has been trading at the Colombo Stock Exchange (CSE) for more than 15 years said. He was disappointed that CSE’s turnover levels were low, and 'nothing was happening".
"How many times have we heard about things like this? For more than 10 years successive governments and authorities have been 'talking' about these strategies, but nothing has been successfully implemented," another veteran stockbroker said. "All we have been doing is 'just' buying shares," he said disappointedly implying that the local capital market hasn't even developed to include other trading instruments such as derivatives.
Least of problems
One of the biggest problems the capital market faced in the past year has been that many planned Initial Public Offerings (IPO) have not taken off. Some attribute this to the political unrest. But most others say that political instability is the least of the share market's problems and it's actually related to the market's dismal performance.
“It is normal for political change to cause a certain degree of uncertainty and speculation until new pol- icies fall into place. The situation was amplified with the expectation of a parliamentary election that increased speculation. Increase in market volatility and speculation during an election is visible even in developed economies,” an industry analyst noted adding that the real issue lies in market dynamics that aren't conducive for IPOs.
“There was a lot of talk about new listings early this year but nothing has happened. The last equity issue was a mere Rs. 75 million raised by Amana Takaful. Last month we had Rs. 6 billion in debentures and that's only debt," the analyst pointed out saying that debt issues being so popular also indicates that the market’s health isn’t that good.
Ravi Abeysuriya, President - Colombo Stock Brokers Association, says that as the CSE experienced a bear market, it is natural that the numbers of IPOs decline as companies defer their decision to list and find other means to raise capital. "During 2010 to 2013 there were 26 IPOs in the Colombo Stock Exchange. Of those, only 15 outperformed the initial offer price to date. Thus, the public will not be easily influenced to invest in overpriced IPOs and hence the number of new listings has gradually declined."
The main issue that IPO s aren't happening is because the multiple that the CSE is trading at is not attractive, Murtaza Jafferjee, CEO JB Stockbrokers said. He pointed out that the CSE has had 'much worse times' in the past, but managed to see IPOs adding that political instability isn’t a factor for this turn of events. “IPOs are popular during bull markets as companies are able to get the best valuation for their shares at the initial public offer.”
High interest rates, rising inflation and the economy in general going south has led to companies not wanting to raise cash as they fear they won't be fully subscribed at an IPO, analysts say.
The positive in all this mess seems to be the World Bank funding that's coming in to develop the capital market. And most importantly the hope that capital gains tax won’t be slapped on CSE transactions.