Stock Market deserves another look by investors

By: R. M. B. Senanayake

The stock market swings 50-100 points each way while the general trend is downwards. Many retail investors have lost money and are now fighting shy of investing in the market. In any case they were more speculators rather than investors. They were led up the garden path by high net worth investors and the Investment Advisors in the Broker firms. They were not told of the risks involved in speculating. They thought that the market was a one way street and that one way was up and up. But the market was on a bubble although the authorities mistook it for high performance. The press and financial journalists played a role in the hype that pushed the market up. Much was made of the fact that the war was over and that the economy would naturally boom with this restraint removed. But a stock market reflects the performance of the economy and the performance of individual companies. Many people doubt the sustainability of the economic growth driven by borrowed foreign money and invested in high cost infrastructure. Whether the infrastructure will promote an economic boom will only be seen when such investment is completed. The performance of the companies will depend on the expansion of the market demand for their products while containing the costs of production. There is something artificial in the type of growth achieved since it is accompanied by current account deficits in the Balance of Payments. The third quarter results of companies are now being published and well known names like John Keell Holdings and CIC Holdings have shown reductions in their bottom lines compared to the previous comparable quarter of  last year. The tea plantation companies also show large losses somewhat offset by the windfall gains in rubber prices. But even rubber prices are weakening. So despite the hype the stock market cannot sustain too high Price Earnings ratios. These ratios have now come down from a high of 25 to a more sustainable 16 or so. There are now companies which are suitable for investment. But a realistic assessment is difficult since two important economic variables are not market determined. They are the Interest rate and the Exchange rate. Both are held at rates which do not reflect the underlying economic fundamentals. One or the other or even both will have to be adjusted sooner rather than later. Meanwhile it is possible for high net worth individuals to ‘pump and dump’ since there is plenty of money, particularly black money and the EPF is willing to invest in the stock market. There are no alternative outlets for investment and investors should examine the fundamentals of the companies and enter the market as buyers of selected shares.