Closure of CSE not a ‘well-managed event’
The prolonged closure of the CSE was from a foreign investor point of view certainly not a “well managed event”, with fund managers skeptical about putting cash into the Colombo Stock Exchange (CSE).
“It is difficult to understand why the market was not being operated remotely like many other exchanges in the region or in the world. Hopefully the management of the CSE has learned from this and will have a better contingency plan in the future,” Thomas Hugger, CEO Asia Frontier Capital told the Business Times.
The CSE was shut down for seven weeks and when the government eased the lockdown on Monday the market reopened. As soon as it did, the prices fell by 10 per cent, creating a circuit breaker, which forced the exchange to shut trading just 38 seconds after opening. On Tuesday, the S&P SL 20 index fell below 5 per cent few minutes after the bourse opened and resumed after a 30-minute cooling off period. On Wednesday it was up with the CSE and SEC forming a committee to iron out issues and make recommendations. The market was mixed on Thursday but gained on Friday.
Although there was initially some understanding given the COVID-19 situation, Sri Lanka unfortunately was part of a group of only four exchanges (also Bangladesh, Jordan and Mauritius) which had closed their exchanges for a long time. This is a risk most foreign investors are not willing to take and thus it is important that the CSE implement changes in order to assure foreign investors it will not happen again, Mattias Martinsson, CEO and CIO of Tundra Fonder in Stockholm told the Business Times. Tundra Sustainable Frontier Fund, a part of Tundra Fonder, entered Sampath Bank’s top 20 shareholders during the first quarter. With 3,440,766 shares (0.90 per cent stake) it was in the 16th place as at March 31.
This closure will certainly hamper future investments into Sri Lanka from emerging market funds and the like. Foreign investors will require a higher risk premium and will be more careful on their allocation to the CSE, Mr. Martinsson added. The extent of how negative this is will depend on what assurances the CSE will make on how to make sure Sri Lanka does not end up in a similar situation again, he stressed. “That said, the equity market is trading at a 10 year low on P/BV, foreign participation has been low for a long time and memory tends to be short when greed sets in.”
An extended closure of a stock market can be devastating for funds/investors with a large holding in this particular market due to redemption/liquidity pressure. “I could imagine that certain global or Asian emerging and frontier funds will be scared in future of investing/allocating large amounts in the Sri Lankan stock market due to liquidity concerns and fears that a long closure could happen again should there be a similar event in the future,” Mr. Hugger elaborated.
Mr. Martinsson added that almost all exchanges around the world (except for the four above) had no uninterrupted trading throughout this crisis. “That is what investors should expect in a modern society, also in emerging markets. The CSE has not explained why Sri Lanka’s situation was that different from any other country that also had extensive curfews. Whether authorities are to blame for not allowing the CSE to open up, or whether it was technical inability does not matter. Communication is key when these events occur and in this case communication was very poor.”
He said that already other emerging exchanges are back on their feet, but foreign investors will remain nervous as to the impact of the crisis. “Fundamentally most emerging markets are already too cheap against their normal is ed long term earnings. We expect a cautious but gradual improvement during the second half of the year,” he said.