Sri Lanka share trading slumps to six-year low

Dec 04, 2008 (LBO) – Sri Lankan shares sagged further Thursday as trading volumes slumped to a six-year low of 13 million rupees with high interest rates and uncertainty over future company earnings keeping investors away, brokers said.

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The All Share Price Index fell 0.18 percent (2.93 points) to end at 1,603.81 while the more liquid Milanka eased 0.24 percent (4.41 points) to end at 1,801.66.

A Colombo stock exchange spokesman said the day’s turnover was the lowest since January 30, 2002 when it had fallen to 12.1 million rupees.

Brokers and analysts said that share prices had fallen to low levels and seemed cheap on historical earnings.

But they noted that global markets had fallen even more sharply and the future earnings outlook for listed companies looked gloomy given high domestic inflation and interest rates and recession in major economies which import Sri Lankan products.

The military’s gains in battle against the Tamil Tigers had also failed to revive enthusiasm among investors, brokers said.

The military has advanced deep into Tiger-held territory, weakening the rebels and cornering them in the north-eastern corner of the island.

On Thursday, the army said its troops had entered a Tiger naval wing base on the north-east coast, bringing them closer to the rebel stronghold of Mullaitivu.

“Usually December is a quiet month,” said Angelo Ranasinghe of Bartleet Mallory Stock Brokers.

“Even when the market is active, come December, volumes fall. But this time, on top of it, the market has had a bad run in the last three months.”

High interest rates were a key factor in trading drying up on the Colombo bourse, along with the lack of positive news on the economy and uncertainty about next year with major economies in recession.

Mohan Thangarajah of First Guardian Equities said the economy was likely to be affected by the slowdown in key export earning sectors with Western economies in recession and the crash in crude oil prices hurting Middle Eastern countries.

“The market for tea, garments and labour has shrunk,” he said. “Also, the global credit crunch and economic crisis means it would be more difficult to attract funds from abroad.”

Ranasinghe of Bartleet Mallory Stock Brokers.said that the sharp fall in global crude oil prices could help to reduce local fuel prices and lower the costs of listed companies.

“Falling oil prices should have a major impact on companies.”

Any reduction in interest rates could also bring money back into stocks.

Brokers said investors preferred to invest funds in fixed income securities where returns were higher.

“High interest is another factor limiting the level of activity in the stock market as people in cash are getting close to 20 percent a year return on fixed income,” said Ranasinghe.

High interest rates were also making margins traders – people borrowing against their portfolios – reluctant to invest in stocks as returns from equities trading were inadequate to cover their borrowing costs.

Interest rates are seen remaining high because of heavy government borrowing to bridge its budget deficit which remains wide largely owing to the high cost of funding the war against the Tigers.