Colombo bourse: A time bomb waiting to happen

The hyper-active Colombo stock market has lost ground as investors resorted to take profits from recent highs which, essentially were not on fundamentals, making the local exchange akin to a time bomb, analysts say.

Many traders came because of factors such as low interest rates, excess liquidity in the market, lack of viable ventures to park money into etc. And now many investors are cashing out.

Analysts agreed noting the high profit- taking mostly by short traders and day traders is bringing the market down.

Some stockbrokers are still hung over the infamous circulars sent by the Colombo Stock Exchange (CSE) in late January - early February. But they know that incident was only a trigger for the CSE to decline. “The first three firms Expolanka, Browns Investments and LOLC mentioned in the circular attributed to 40 per cent of the turnover of the CSE at that time and the circulars created shockwaves but it wasn't the reason the CSE is declining,” a stockbroker said pointing out this decline was 'due'.

Another stockbroker best explained it saying the CSE was sitting on a time bomb with an overheated market - the CSE only pulled the pin with the circulars. "After the market's exponential rise, most investors walked away taking profit.”

The share splits, which is when a firm issues more shares of stock to shareholders without reducing the value of their stakes- that were announced didn't help either.

They don't give real value to the shares. The share prices of those firms whose share subdivisions were announced have come down by almost 40 per cent.

The hype and heat created by the split declaration saw these shares increase in price ( which was an artificial rise) and (mostly) the first time traders who followed these shares got burnt. While this isn't 'pump and dump, share splits does this to share prices.

An analyst pointed out that in January, amidst the 30 per cent rise in the market, two or three corrections should have happened. January's turnover was more than the years 2012, '13, '16, '17, '18 and '19 combined. "The euphoria in January on the value in the CSE and the price hike was too much." This rise in January is the highest rise in the CSE in a single month.

Another analyst pointed out that although the margin trading providers grant 50 per cent in margins to purchase stocks, the investors should have bought shares for only about 35 per cent of the margin for the mere reason that should their stocks come down in price, they wouldn't be forced to sell. Predictably the opposite is what happened. When they had the purchasing power, with every single cent in their possession, these investors had bought shares.

The CSE activity is low but participants refuse to be down and out - as they should be. Most stockbrokers are not that perturbed as they believe this correction in fact is a good sign. "The activity levels will resume once the market hits realistic levels,” a third stockbroker said.

As will be the case many are confident that once wounds are healed, the same prey will return to the market.