Credit concessions came too late; does nothing to lift CSE spirits: Analysts

The recent credit concessions by the Securities and Exchange Commission (SEC) came in a tad too late and it won't do much to the stock market which is now in a precarious position, analysts say.

Indices snap

The indices snapped sharply on Tuesday despite the SEC announcing a relaxation of the credit rules where brokers are now allowed to lend up to three times their net capital. "Credit is mainly used by short term traders to leverage and capi- talize on the positive market trends. Allowing credit on a negative market sentiment would only pave the way for the sellers to bail-out easily capitalizing on any positive price movements," an analyst pointed out. He added that investments expected in a discounted market are with a medium to long term perspective and such long-term investments are rarely leveraged and only invested strategically.

However others say that allowing brokers to let credit facilities under set limits is welcome by the industry as it will call off the force-selling that adds to the fall of the market. "The credit allowance will come

The credit concessions will do very little- as evident by Tuesday's activity. The retailers who were stuck with high cost junk shares were waiting for an opportunity to load them onto an unsuspecting third party with access to broker credit.

handy when the market settles and adjusts to its proper levels," Thakshila Hulangamwa, Director Asha Phillips told the Business Times.

Tuesday saw the indices strike within the first 10 minutes, with the benchmark All Share Index (ASI) reaching a peak of 6,040 (+1.8%) while the more liquid Milanka touched 5,170 (+2.4%). The upturn was short-lived as the indices from that point saw a gradual decline with activity heavily centered on the speculative counters driven by high level of retail participation. "The credit concessions will do very little- as evident by Tuesday's activity. The retailers who were stuck with high cost junk shares were waiting for an opportunity to load them onto an unsuspecting third party with access to broker credit. The market fell when the rest of the retailers realized this," another analyst noted.

No bubble

While many don't forecast a bubble, they say that the market needs a lot more confidence. "A bubble can be expected in an over enthusiastic market where investors get over shadowed by sentiment. It is not necessarily supported by credit alone. Credit is only an option for the intended speculator and it's based on risk appetite of the investor," Mr. Hulangamwa noted.

He added that in the past 18 months the market was purely a local retail driven market where a significant exposure was done by the retail traders on low cap counters. "Since we are a small market and we have no way of capturing such counters separately on a selected criteria the ASI was boosted unexpectedly that drove all market indicators to overheated range. If you look at it counterwise none of the fundamentally stable counters was in a bubble state," he pointed out.

He said that during the correction of the market which came along with a little bit of negative macro conditions, there was some foreign selling that weakened blue chips alongside the over boosted counters."

Analysts stress that what is imperative is the foreign investor confidence. "We need foreign investor confidence, a strong SEC which is hard on blatant manipulation, added liquidity and lower interest rates, improved corporate performance and more educated investors who make rational decisions and calculated risks," a second analyst stressed.

He also said that the SEC needs to be tough on the market manipulators. "As long as the big players continue to manipulate the rest of the market- confidence levels will stay low." The second analyst noted that the SEC should also push for higher corporate governance and disclosure levels.

"CSE still is in stages of infancy. Even most of the blue chips have pitiful disclosure," he noted. He also noted that a system to track low cap companies separately on a different index would be the best solution to avoid volatility in the market.