Diversify, think long-term, accumulate value

The Colombo Stock Market (CSE) reached its highest ever level in history so far, on February 14, 2011. At that time, the All Share Index (ASI) was at a peak of 7,811 points and the market capitalisation touched Rs. 2,600b. Of the above market cap, the first 20 companies accounted for a market cap of Rs. 1,699b, which worked out to about 65 percent of the total market cap.

By August 24, however, the ASI had declined to 5,013 points, and the total market cap had dropped to Rs. 1,917 b, while the first 20 companies' market cap had plunged to Rs. 1,067b.

Market capitalisation

The ASI had dipped about 36 percent during the 18-month period, and the CSE market cap had reduced by Rs. 684 b. The market cap of the first 20 companies had reduced by Rs. 631 b, 92 percent of the reduction in all companies.

These salient features had probably not been understood by many, and certainly not been acknowledged by those who have continuously attempted to portray that the CSE is mismanaged and is a place where massive misdemeanours and fraud is taking place, and that its many stakeholders are rogues and are a part of an unscrupulous mafia.

As is well-known, those who suggest that malpractices and frauds are abundant at the CSE, had by their actions, been able to systematically destroy the market sentiment and discourage thousands of would-be investors from entering the bourse. This resulted in the stock market becoming the only market that did not keep pace with the rest of the major economic developments in the country.

This position is corroborated by the fact that the economy had been displaying strong growth and the top corporates of the country have been recording above average earnings, which should have supported an upward movement in the ASI in 2011, instead of the practical outcome of the rapid downward trend.

That is probably why the simple analysis which shows that the overwhelmingly large part of 92 percent out of the drop in the market capitalisation had occurred in the first 20 companies in our country, is very significant and relevant.

That powerful fact runs counter to the position claimed by the dooms-day mafia in that it clearly suggests that the reduction of the market cap was not due to any alleged irregular practices, but more likely because of the regular horror stories churned out by the doomday mafia that malpractices are taking place in the market, on a large scale.

Market analysts

All stock market analysts know that the first 20 companies by market cap, namely; John Keells Holdings, Ceylon Tobacco, Carsons, Commercial Bank, SLT, Bukit Darah, Nestle Lanka, Dialog, Aitken Spence, HNB, Distilleries, Asian Hotels, Cargills, DFCC, Sampath, CT Holdings, Aitken Spence Hotels, Hayleys, Chevron Lubricants, and Lanka Orix, have all performed better year-on-year, in 2010 and 2011. Those companies have been able to report strong results in the first half of 2012.

Quite clearly, their earnings have increased while shareholder value addition has enhanced.

That fact also supports the conclusion that the sharp reduction in the share prices of these top 20 companies over the 18 months, February 2011 to August 2012, is not due to any fraud, manipulation or other sinister cause associated with the company, but a diminution in value of the shares of those companies that has arisen due to the negative local sentiment.

As is also well-known, this negative sentiment has been driven by the well-focused doomsday mafia led by a vociferous anti-China MP and a former Chamber of Commerce leader who was under a cloud in his own company by purchasing a house from the company at a huge discount.

Fortunately however, since late August 2012, this artificially engineered trend, driven by the doomsday mafia seems to have lost steam, and the ordinary stock market investors have begun to display greater confidence and positive sentiment. Consequently, it seems only a matter of time before the appropriate upward correction takes place in the ASI, and realistic values are reflected in the share values of the first 20 companies, as well as in other listed companies with potential.

Store-house

As repeatedly stated in these columns, the Sri Lankan stock market is a store-house of substantial, intrinsic value. Such value has already been identified and appreciated by many foreign investors. This is why those foreign investors have been acquiring shares with a voracious appetite at an unprecedented pace, while Sri Lankan investors have been hesitant, cautious and slow. Nevertheless, of late, the appointment of a pragmatic and knowledgeable professional as the Chairman of the SEC has spurred Sri Lankan investors again, and that is an encouraging sign.

The Sri Lankan economy is quickly realising its true potential, and is progressing confidently in its journey towards the US$4,000 per capita income goal. The transformation of the economy to serve as a Maritime, Aviation, Energy, Commercial and Knowledge hub in Asia, is slowly, but surely taking place.

It is now also readily acknowledged by many Sri Lanka observers that many decades of growth is undoubtedly ahead of the country.

In that scenario, investors who take a long term view and position themselves in the stock market with a diversified portfolio, will do themselves and the country a great favour, since they are bound to enjoy substantial financial benefits in time to come supporting the capital market development of the country.

That is why it may be appropriate to recollect the wise words of the world renowned investor in emerging markets, Mark Mobius at a time like this. His first recommendation to investors was that their "Best protection is Diversification". Another recommendation was that they must take a long-term view in that they must "Wait five years and call me in the morning". Sound advice... Diversify. Think long term. Accumulate value.