The Colombo Stock Market received a further boost last week, with the re-entry of Janus and State Street, two U.S. based funds into the market, but a stock market analyst cautioned that hotel stocks were overheated.
“They are being traded on the basis of envisaged profits for next year, which is not healthy,” he told The Sunday Leader.
The re-entry of foreign funds is after a lapse of several weeks, he added.
They are looking at Hatton National Bank (HNB) and Commercial Bank, he said. Tagging along with them is the Central Bank supervised E.P.F.
Some 250,000-500,000 HNB shares changed hands in the last working day of the short week just concluded due to the Vesak holidays, while all in all several hundred thousand shares of both of those banks were bought by these funds last week, he said.
With local investors in term deposits withdrawing those funds and reinvesting the same in stocks and shares because of a low deposit rate regime prevalent in the market, coupled with the increase in stock market literacy by the mass market, those too have contributed to the growth of the Colombo bourse in the past few months.
The two market indices were up by 24.5 and 39.57 points over its Tuesday’s closing price to finish the week at 4,250.99 (a.s.p.i.) and 4,761.35 (m.p.i.) respectively, while turnover hit the Rs. 1.1billion mark, a regular feature these days.
Meanwhile private sector credit is slowly picking up, with credit growth in March increasing by Rs. 23 billion (1.9%) month on month (m.o.m.) to Rs. 1,235.1 billion, but showing a year on year (y.o.y.) marginal decline of Rs. 1.1 billion (0.1%) despite a decrease in lending rates from 20% to 14-15% to the “vulnerable” s.me. sector in particular in recent months. A contributory factor to the slight upward turn in private sector credit growth may be due to the contraction in lending to the Government and State Corporation sector, an action that may ease pressure on rates.
Credit to the Government and State Corporation sector declined by 0.9% m.o.m. to Rs. 752.1 billion in March, while the y.o.y. decline was 0.6%.
If the month of March and before may be considered as uncertain months due to the elections and therewith cautiousness in both lending and borrowing, last week’s Treasury (T) Bill primary auction, in a week shortened by the Vesak holidays, saw a stagnation in yields, with the three month tenure falling by a marginal three basis points to 8.1%, while the six months and the one year yields stagnated at 8.88% and 9.23% respectively.
The market attributed this to the rise in commodity prices causing inflationary pressure on the economy, a dampener to bringing down rates and the Central Bank keeping its policy rates unchanged (lending at 7½% and borrowing at 9¾%). Last week these pages predicted that interest rates have bottomed-out. With bad debts rising, the industry concentrated more on collections rather than lending in the past few months, but things appear to be turning around, with banks even thinking of restarting lending to the s.me. sector, considered a risk category. Bank lending to the private sector last year was on negative terrain.
A mismatch in deposit and lending rates (until a few months ago bank deposit rates were close to the 20% levels or more) are also a stumbling block for banks to reduce lending rates due to the high cost of funds associated with high deposit rates.
But with the market flushed with liquidity and the U.S. dollar-rupee parity stable at the Rs. 113/60/90 levels these days, the market expects rates to decline in the coming months.
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