Stock market turns back reflecting economic reality

The socio-economic reality should be reflected by the stock market in any country, as it is comprised of companies operating different industries in the economy.

However, there are some cases where the stock market doesn’t reflect the reality, being too irrational. This can be applied to the Colombo Stock Exchange (CSE) as well.

It is needless to note that the CSE was struggling for its survival for the past few months, mainly due to the unfavourable economic condition globally as well as locally.

Before

Higher taxes that were imposed on businesses discouraged the business community to make further investment, pushing unemployment up and production down. By the second quarter of the year 2018, unemployment in the country went up to 4.6 percent, despite the annual unemployment rate for the year 2017 being 4.2 percent, according to the Central Bank statistics.

Because of higher inflation and income taxes slashed the disposable income, the consumers hesitated to spend on things, resulting in lower corporate sales and profits.

Moreover, owing to the recent rupee depreciation at an unprecedented pace, the overall economic outlook was problematic, having been further fuelled by global economic conditions, especially in the USA. This economic tragedy, which led the government to implement some austerity measures by restricting imports, opened a can of worms in almost every aspect of the economy.

Accordingly, the CSE was badly hit by this kind of unfavourable business environment. All the companies that are listed on the bourse were actually struggling for their survival, not for expansion. Therefore, this negative economic outlook could be clearly observed in the bourse.

The All Share Price Index (ASPI) crashed below 6000 points recently, reflecting that the economy is not doing well. It has to be accepted that the CSE is held by foreign investment, as the local investor participation is not sufficient to boost the market.

Political change

Former President Mahinda Rajapaksa was sworn in as new Prime Minister of Sri Lanka few days ago, creating a debate whether this is legal or not. The United National Party and other allied parties say that this is totally illegal and unconstitutional, while prorajapaksa elements argue that this is legal.

For a while, leave the political ideologies aside and think how much economic cost this has caused the country. There is nothing to argue that the nation has faced a state of anarchy, being a politically as well as economically unstable country. Many public offices are still paralyzed, as there is no strong political leadership to manage them.

Even though the long-term economic outlook is not so clear for Sri Lanka, the appointment of the new premier was able to create a wave of positive expectations among the public, especially the local business community.

The bourse was boosted on the following day with the ASPI going up by 112 points. The foreign investors that don’t see clear economic direction in the country are selling stocks, while some high-net-worth investors that place their trust on the Rajapaksa administration are buying stocks.

Accordingly, it could be observed that the shares of the companies engaged in the construction industry suddenly went up in price. This pushed the ASPI above the threshold of 6000 points.

Reality

The reality is that things are getting worse day by day. The end of the political crisis cannot be expected to be over soon. Hence, the previously seen expectations are gradually getting shattered among the investor community. No stock market in the world can completely depend on expectations, as it needs real actions.

Even though the economic crisis and related dialog were covered up by the political crisis, the economic problems, which were in the limelight before the political change, have not actually been solved.

The rupee is further depreciating. More US dollars need to come into the country, if this is to be stopped. This can never be stopped by a political change. Moreover, it will take time to come back to normalcy, even if they implemented some sound economic policies. In a nutshell, miracles should not be expected.

Reflecting this unstable economic situation, the ASPI crashed below 6000 points once again, a few days ago. It is always emphasized that politicians are the managers of the economy. Hence, they should be well-behaved. As they are evolving backward in the history, the stock market is also turning back.

In conclusion, whatever said and done, the economy is the victim of all these political dramas.