View from Colombo: Uncertain climate affecting stock market

Last month's political developments in Sri Lanka demonstrated clearly that the fortunes of the island's stock exchange are linked to political stability.

As shown in the recent past, political stability pushed share prices to astronomical heights on the Colombo Stock Exchange while uncertainty caused by unexpected political developments led to its overnight crash.

For example there has been an upward movement of the bourse as investor confidence was boosted following the election in 2001 of the business friendly United National Front government.

The subsequent ceasefire agreement between the UNF government and the Tamil Tigers leading to the now suspended peace process, the $4.5 billion aid package to revive the economy with ambitious development projects and number of other factors help boost investor confidence which was reflected in the performance of the stock exchange.

This upward trend continued recording one of the highest daily turnover of Rs1.3 billion in the history of CSE last October when the overall turnover for this year reached Rs60 billion. The All Share Price Index (ASPI) recorded an unprecedented growth of 74 per cent turning CSE into one of the best performing markets in the world until November 3.

Yet, there were clear warnings of an unexpected collapse and, during last October alone, two professionals warned that the sharp rise in stock prices cannot be sustained.

One analyst warned that the bubble has all the potentials of disappearing overnight without a trace. Because in the speculative bubble concept, activities of speculators often influence the market as speculators are usually gamblers operating in the market with the objective of making short term gains.

There were also other serious underlying problems such as internal ethical issues, insider dealing, front running and kickbacks which in turn could trigger an eventual collapse of the stock market.

Some analysts who take cautious view of the equity market even now express the fear that the CSE is bound to suffer due to lack of regulations among participants.

In the midst came the unexpected political developments when the President Chandrika Kumaratunga fired three key ministers and suspended the parliament. The Executive and Legislative powers were in the hands of president and prime minister who both belong to two different parties which were already at loggerheads over the management of the economy and the peace process as well.

This unexpected political development shocked the investors who feared of political uncertainty as the fate of the fragile peace process, thrown into turmoil, became unclear.

The immediate repercussion was the collapse of the turbo charged stock market often driven by large local and foreign investors who work with their own short term interests. With big sharks dominating the market, things became very difficult for short term investors who could burn their fingers with poor quality advice.

In the midst came the budget announcement imposing a 15 per cent tax on share trading profits which was later clarified as applying only to corporate and not individual investors and small players.

With the two main political parties failed so far to agree on a common working programme the political uncertainty continues leaving the stock market volatile. The need of the hour is political and economic stability and more fundamental investors rather than speculators to attract significant investment with confidence.

Meanwhile there have been warnings from all sides on the need to pass the benefits of market economy to larger majority in the middle and low income groups, especially in the context of the luxury enjoyed by a small group of wealthy elite, to avoid the frustration of the majority being exploited by political forcers.

The writer is a Sri Lanka based journalist.