The Colombo Stock Exchange (CSE), the country’s only capital market, can be considered a barometer of the economy, as it is economically sensitive and quick to respond.
It has been a place over the years where the businesses could find capital, investors could make their money grow and the nation could attract foreign investments as well. Accordingly, even though it seems the place for net-worth investors, it is actually the pool of wealth in the country that hopefully energizes the economic journey.
The stock market, which was identified a bearish market for the past few years, indicates positive trends due to a lot of reasons. For a stock market to get bullish, the macroeconomic environment and political stability need to be in a good condition. They are of course very large concepts into which we can put every topic discussed in economics and politics. That is why it has to be closely examined, in order to get an idea where the market is headed in the new year.
Foreign investments at the stock market will always make it stronger because the local investors alone cannot push it. It is reported that the market could draw Rs.1.6 billion net foreign buying in the first three days of this year.
There was a net foreign inflow of Rs.23 billion in first half of the year 2017 as well. It could be seen that the foreign investors have been continuously investing in the CSE, as they see something pertaining to the Sri Lankan economy, which many local traders cannot see.
Foreign investors don’t invest in every stock traded in the market. In fact, the salient features they look for are liquidity and value addition of the stock. The foreigners are interested in investing less than 10 listed companies. Hence, it is needless to emphasize the necessity of getting companies listed with stocks tradable.
Furthermore, a company stock will not be a tradable stock overnight; it has to be a profit-making business and provide the shareholders with some returns like good dividend payout, bonus issue and right issue, etc.
The business volatility gets worse with fast-changing economic policies such as tax, interest rates, trade pacts and any rules and regulations for the financial system. It can be noted that the clarity over the road map 2018 made by Central Bank Governor Dr. Indrajit Coomaraswamy has inspired investors to come forward and venture into new areas.
However, this has to be coupled with political stability, which in my opinion is one of the key factors for making decisions on investments. It is up to the government to assure political stability and implement long-term policies, in order that the market indicating positive trends can be further revived.
We cannot be satisfied with the number of companies listed on the CSE, as there should be plenty of listed companies and investors for a market to get bullish. LVL Energy Fund and Jetwing Symphony were listed very recently. Their Initial public offerings (IPOs) were oversubscribed on the opening day itself. It is with IPOs that the market can draw a new pool of money that boosts the market.
Finance Minister Mangala Samaraweera in his maiden budget speech suggested to list two state-owned banks – Bank of Ceylon and People’s Bank on the CSE. Not only this but also many more state-owned enterprises should be listed with the dual purpose of earning an income for the government and making the market stronger. Rules can be amended to accommodate more companies in the CSE, while ensuring market stability and protection of investors.
Some cash injections into the economy can be seen via foreign direct investment, especially from China, the Hambantota port lease and loans. The main leakage from the economy is public debt. Once injections are higher than leakages, the economy can be called healthy. The government is planning to sign trade agreements with a number of strategically important countries. GSP Plus also can be harnessed.
With these changes positive in economic perspective, it can be concluded that the businesses will be able to generate more cash injections for the economy. The CSE has started recovering. The government must do its part discussed above so as to accelerate the market growth.
(Amila Muthukutti is an economist)