The devil is not as black as shown by some

The negative news reports surrounding Colombo's Stock Market increased with the SEC Chairman's recent resignation. However, the silver lining in this episode is that there is now an opportunity for a knowledgeable professional who understands stock markets, with a solid regulatory background, to take over and move forward. In today's globally volatile markets, a regulator must possess the skills and attitude to understand that a down turn or an up turn in a market is not necessarily because of manipulation, and that it could very well be because of other external factors.

At the recent Association of Professional Bankers' Conference, the keynote speaker from Malaysia's CIMB Bank, referred to the prevailing global uncertainty and the challenge of remaining viable in such conditions. A thorough understanding of these changing circumstances is vital for regulators and stakeholders in Sri Lanka's stock market, but unfortunately, at present, there seems to be only a marginal appreciation of this reality.

The market capitalisation of the CSE this year has suffered an almost 18 percent drop. Knowledgeable investors know that this down turn is more a result of the global uncertainty, rather than a situation peculiar to Sri Lanka. But strong terms like "pump and dump", manipulation, "mafia" action, insider trading and fraud, have been extensively used by regulators and analysts to explain the reason for the downturn, without understanding the true meaning of those terms.

Perhaps, they should have studied the Facebook share issue carefully, so that they could have gained some insight as to how volatile today's markets are. The Facebook share opened at $35 per share when its IPO made its debut in May.

At that time, the market cap of Facebook was $104 billion, which is more than five times the market cap of all Sri Lankan listed companies. By mid-August, the Facebook share had fallen to $19, which meant the market cap of Facebook had crashed to $56 billion.

The reduction of $48 billion is about 2 1/2 times the market cap of the entire CSE! Even in the face of such a major slump, the SEC and other regulators in the USA have not alleged manipulation, pump and dump, mafia action, insider trading, fraud or threatened the issuers, brokers and underwriters with jail terms. However, some persons believe that if a similar downturn had taken place in Sri Lanka, the Sri Lankan regulators would have screamed foul play, and quite possibly, even attempted to charge the issuer, (in this case, Mark Zuckerberg), with pumping and dumping.

Unfortunately, Sri Lanka is now becoming notorious for biased analysis that is unleashed on the public by certain opposition members and some sections of the business media. A classic example of such analysis occurred during the past few days.

Many banks, including Commercial, DFCC, HNB, NDB, Sampath and Seylan reported massive profits in their half-year results. In the media commentaries that followed, there was no mention that the EPF held equity stakes of nearly 10 percent in each of those institutions.

During the same period, many other corporates too, reported substantially higher earnings, in which companies too, the EPF held substantial holdings ranging from 2 to 10 percent. Here too, the media reports did not mention that the EPF held such investments.

However, in the only instance where one finance company in which the EPF held 8 percent, recorded a loss in its half year results, such fact was vigorously highlighted by several commentators. This type of one-sided reporting confirms the suspicion that there is an organised effort to discredit the EPF, and discourage long-term State investors from investing in the CSE.

This blatant bias also confirms the concern that there is a deliberate campaign to engineer a shift of the EPF fund management activities from the Central Bank to private "outsourced" parties.

While this local drama is being enacted, foreign investors have returned to the bourse, with inflows of over Rs. 28 billion,so far this year, as against an outflow of Rs. 19 billion, last year.

These hard-nosed investors are not fooled by the local media horror stories, and are satisfying their healthy appetites to invest in the Colombo market, although local investors who are regularly given a heavy dose of negative sentiments by the harsh reports, are taking a back seat.

That is why local investors will do well to learn a lesson from recent history.

In 2002, the market cap of the CSE was less than $ 2 billion, but by 2011, it had risen nearly 10 times, to $ 20 billion. In 2002, the GDP of Sri Lanka was only $17 billion, but by 2011 it had increased nearly three and a halftimes, to $ 59 billion.

In 2002, the CSE market cap was only 12 per cent of GDP, but had risen nearly three times, to 30 percent by 2011.

Comparative analyses of countries that progressed towards a GDP of $ 100 billion in the past, indicate that the market cap of the stock exchange of a country rises to over 50 per cent of GDP by the time the GDP of the country reaches $100 billion.

Such empirical evidence suggests that the market cap of Sri Lanka's Stock Exchange would probably exceed $50 billion when the country reaches a GDP of $100 billion, within the next four years or so. That means, CSE's market cap has the potential to rise about two and a half times, by 2016.

Hopefully, that type of awareness should open the eyes of local investors, and help them to shrug off the daily doomsday stories that are craftily spread by dubious parties. When that happens, it will surely encourage the locals to return to the CSE, ahead of foreign investors who are today positioning themselves to reap massive benefits in time to come. Simply stated, Sri Lankan investors must quickly understand that the devil is not as black as it has been painted by some!