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On Razor’s Edge

Dec 18, 2010 12:45:58 AM - thesundayleader.lk

The “drag down” of the bourse which began a couple of weeks ago will continue till the year end because of the holiday season that would lead to a further contraction in demand as a result.

The “light at the end of the tunnel” may once more be seen if foreigners re-enter the market, a source said.
The fourth quarter (4Q) appears to be good for banks with interest rates coming down and higher earnings as a result. That may be a carrot to induce foreigners to return.
Foreigners’ calendar year begins in September. And market expectations then were that they will have had re-entered the bourse with the new allocations in October/November.
But instead the reverse took place, they began to sell. The cause was the market’s high PE ratio, which at one time was as high as 26. It has since come down to 21. Expectations that 4Q earnings would be better, quarter on quarter and year on year, may tempt foreigners to re-enter the market due to a further correction in the PE ratio, and give the bourse that much needed thrust. Otherwise the declines will continue, as locals have no holding power. A good stock like Aitken Spence was allegedly a victim of this scenario at Wednesday’s trading, where it fell on a nominal parcel traded.
When some stockbrokers books showed a Rs. 1-2 billion unsecured credit, Securities and Exchange Commission (SEC) should have had acted then, rather than wait for the “last moment” to take action against such “dangerous” practices.
If a broking house had collapsed because of irresponsible credit giving, there would have had allegedly been a “run” on the market.  Expectations in the middle half of the year were that foreigners will come. That’s what pushed-up the market, by locals, backed up by allegedly receiving unsecured credit by brokers, and on the flip side, raising the market P/E ratio to unsustainable levels.
But when foreigners didn’t come, and instead started selling, coupled with new rules framed by the SEC subsequently, such as price bands on stocks and margin trading by brokers being disallowed (first the deadline was set at December 31, but subsequently extended to March 31, ie 50% of stock broker credit having had to be recovered by then and the balance by June 30 of next year) the local investors, the retail sort, who have no holding power, began to sell, bringing down the market.
Every month stockbrokers file their returns to the SEC. SEC is aware of this dangerous trend, ie investors being provided with unsecured credit, amounting to not millions, but billions by stockbrokers, they should have had moved in then, and not wait for the “last moment” to have in place new rules and regulations to curb such practices.
A stitch in time saves nine.
Government administered institutions such as the EPF, which, time and time again used to intervene in the market to prevent its steep declines, have been absent in the recent days, giving an indication that they too have since covered their positions and have no more room to enter the bourse.
So the only way out appears to be “foreign intervention!” Otherwise it may be “doom and gloom” for the bourse.