Sri Lanka stocks slump 1.5-pct to a 7-month low

July 25, 2011 (LBO) – Sri Lanka stocks slumped 1.5 percent to a seven month low, reaching with the benchmark index falling to levels last seen last on December 23, as the market corrected downwards, brokers said. The benchmark All Share Price Index closed at 6434.34, down 1.57 percent (102.91 points) while the Milanka Index of more liquid stocks fell 2.24 percent (135.18 points) to close at 5894.57, according to stock exchange provisional figures. The Milanka index hit a near 11-month low not seen since September 23, brokers said.

Analysts have been warning since last October that Sri Lanka’s stocks were overvalued and a correction was overdue when the island’s price to earnings multiples overtook most of Asia.

Earnings of companies have since improved, bringing the market price to earnings multiple falling to around 22 with higher corporate earnings and weaker prices, compared to levels of around 28 times seen late last year.

“Forced selling brings the prices down sharply triggering more margin calls and forced sales,” Capital Trust Stockbrokers, which has a large small investor base said in a report.

“This phenomenon was the main cause of the recent sharp declines in the market indices.”

Credit driven speculative buying especially on illiquid stocks became common when foreign investors started to sell out of Sri Lanka from late last year. The regulator also clamped down on credit fearing a greater bubble.

On Monday diversified John Keels Holdings closed down 5.70 rupees or 2.93 percent to 189.10 rupees with 435,000 shares worth 81.3 million rupees changing hands. The stock was the the top contributor to turnover.

DFCC Bank closed down 2.50 rupees or 1.92 percent to 127.50 rupees. Stocks worth 72 million rupees or 555,000 million shares changed hands including an off market dea of 440,000 shares at 130 rupees.

Keels Food was the highest percentage gainer of the day closing at 118.20 rupees up 11.20 rupees or 10.48 percent.