Stock market driven by peace

Despite uncertainty over the collapse of the Ceasefire Agreement between the Government and the LTTE growing, the Colombo Stock Exchange (CSE) says that the stock market is driven by peace and not by the political factors or the party in power.

The CSE annual report 2005 said that though these political factors impact on short term investor perception and share prices peace is the main factor that the CSE performance depends on.

Year 2005, the third year after signing of the MoU between the government and the LTTE, CSE marked a year of best performance. During the year the ASPI and MPI appreciated by 27.5% and 18.1%.

During the year CSE recorded the highest figures in annual turnover, market capitalisation, number of shares traded and foreign investment.

The Annual turnover for the year recorded Rs. 114.6 billion. Market capitalisation recorded Rs.772.8 billion while 5.1 billion shares were traded. Total foreign investment recorded for the year was Rs.6.1 billion.

The Market's momentum was checked by the escalation of violence in the North and East subsequent to the Presidential election, the CSE closed the year registering an average turnover of Rs.482 million per day, the highest recorded.

CSE achieved this performance in a competitive environment. Market turnover has strong positive correlation to the interest rate and the depreciation of the rupee. During the year both factors were not favourable and interest rates increased from 8% to 9% and the rupee remained comparatively stable. Under these circumstances, the recorded turnover is more significant, the report said.

The widely held view is that domestic investors tend to follow foreign investors. Throughout the year, foreign investors were net buyers and the net foreign inflow was Rs. 6.1 billion. Foreign investment inflows in the third quarter topped Rs. 5 billion, the highest net foreign inflow that CSE has received during a single quarter. However, in the fourth quarter net foreign inflow dropped to Rs. 1.1 billion and in that quarter the ASPI declined by 21%, a steep decline in a single quarter in the history of the CSE.

Investment patterns of local and foreign investors differ when prices change. Local investors tend to invest when prices appreciate whereas foreign investors follow the opposite, the report said.

(GW)