• Market Review

Market Review

When Will The Selling Stop? Have we seen the bottom of the abyss?
It will be interesting to hear what the 'fundamentalists' have to say about the selling frenzy that has taken charge of the local bourse. Economy is currently enjoying mini boom according to our Central Bank:

* a growth rate of 6.0% is expected on top of the impressive 6.4% achieved last year;

* Budget deficit has narrowed down from 8.5 in 1994 to a mere 4.5% last year;

* Inflation eased from 15.9% in 1996 to juts 9.6% in 1997 and expected it to fall towards 8% this year;

* Prime lending rate down from 20.1% in 1995 to 15.2% last year;

* Unemployment down from the 1993 figure of 13.8% to a moderate 10.4% last year;

* Main agricultural export tea fetching record high prices last year and continuing to do so this year;

* Tea production rising to make Sri Lanka the largest exporter;

* Garment exports rising to unprecedented levels despite the devaluation of East and South Asian currencies;

* Cost of imported inputs falling as a result of currency depreciation in suppliers' countries;

* Almost all the listed companies have recorded tremendous increases in turnover and profits;

The list of achievements go on and on, but despite all these positive news the stock market is at an all time low (in US$ terms) and sliding lower. This proves in no uncertain terms that it is naive to base your trading / investment decisions on the so called sound (or unsound) fundamentals since it is the sentiment and mood of the players that will ultimately determine the direction in which the market will move. The only indicators we have of the current market sentiment are the technical analyst's charts and indicators, all of which are at present pointing towards a further decline. On Thursday the market fell through the 'Neckline' of a massive 'Head & Shoulder' formation that had been developing on the long term charts of the ASI & the SI (see annexed graph) since the early nineties. This is a very bearish signal that will undoubtedly push the market to an unfamiliar low domain. Market is likely to trade in a range below 600 during the run up to elections unless the authorities recognise the crisis in the market and take appropriate remedial measures. After all one mustn't forget the fact that the real proof of efficient management of a free market economy is provided by the performance of the country's equity market. For instance, whatever mess he would have got himself into in his private life, Bill Clinton is given due credit for bringing US to a position of enviable economic strength. The US market by venturing into record high territory has acknowledged this fact. On the other hand our market is back at where we started, just after the JVP insurrection in the late eighties and early nineties.

Balangoda & Udapussellawa offers couldn't have come at a Worse Time
Despite the bad timing of the offer it appears as if they have managed to find a buyer for the 19% stake in Balangoda, currently held by the Government, though an official announcement is yet to be made. The closing date for receiving proposals for the disposal of the government held 19% stake in Udapussellawa has been extended till 4.30 p.m. on 25th August, 1998. A company in the banking and finance sector that has shown a keen interest in the plantations sector is tipped to be the successful bidder for Balangoda in the coming week.

Market Outlook
Activity Likely to pick up as Investors Adjust their portfolios im the new trading range
The trading volume is likely to pick up as investors adjust their portfolios. Long term position takers may also do some aggressive buying as the market dips down towards the new support levels. Though it may sound a little absurd a trading range below 600 is most likely in the coming months. After a momentary dip to a fairly low level the market would star recovering rapidly as bargain hunting gather momentum. For investors with a medium to long term perspective the local bourse offers the best avenue for investment at its current depressed level. The market based on historical earnings is an unbelievable 8.92, and by the look of quarterly results for the first two quarters of this year the P/E ratio based on expected earnings will be obviously below 5. Can anybody go wrong cashing on these absolute bargains?

Market statistics
The advancers to decliners ratio for the week was 0.39:1. It fluctuated during the week from a low of 0.3:1 to a high of 0.56:1.Foreign activity for the week accounted for 11.46% of the turnover. Net foreign sales amounted to Rs. 30.26m.

Heavily Traded Stocks
Balangoda (4,130,400), Distilleries (2,304,200), Madulsima (1,148,400), Dockyard (581,100), Sampath (342,900), JKH (198,400), Veytex (185,900), Vanik W2 (171,400), Vanik (160,400), MLL (149,100), Asian Hotels (142,000).

Gainers: Stocks that moved up significantly during the week were:

Losers: Stocks that moved down significantly during the week were:

Political Outlook
The Falling yen and Monica Lewinsky shaking up the US Markets
The phenomenal fall of the Yen against the dollar and Bill Clinton's confession about lying under oath on his much publicised affair with Monica Lewinsky, brought pressure on the US currency & US markets. The falling Yen is pushing the US trade deficit with Japan to record levels threatening the viability of US manufacturing businesses. Despite repeated intervention by G7 central banks Yen is continuing t slide lower threatening the Western Economies. Only power that managed to halt the rise of the dollar, at least temporarily, was the possible impeachment of Bill Clinton, as a result of his public admission of lying under oath in a deposition in the Paula Jones case. Political instability in the US could easily trigger a significant sell-off. Already some funds have started looking elsewhere to park their funds. The recent recovery in the Hong Kong market could have been partly due to this exodus of funds from the States.

Economic Outlook
Will the collapse of the Ruble affect our tea market
In a desperate attempt to avoid raising interest rates to support the collapsing Ruble the Russian government broadened the trading band allowing the domestic currency to depreciate by 30% of its current rate. Some predicted a fall in tea exports as a result of the Ruble devaluation. This is highly unlikely since we export cheaper grades of tea to Russia. Economic turmoil which will inevitably follow the devaluation is unlikely to affect the demand for tea, since the expenditure on tea is just an in significant and affordable fraction of the total expenditure on food & beverages of a typical Russian family.

Treasury Bill Auction: The Treasury Bill auction held on Wednesday 19th August 1998 was over-subscribed with bids amounting to Rs. 6,770m received. The government offered treasury bills worth Rs. 4,204m at the auction. The weighed average yield for three-month bills increased by 5 basis points to 12.50%. For six month bills the rate increased by 3 basis points to 12.90% & for twelve-month bills it increased by 3 basis points to 12.99%.

Stock Recommendations

- CDIC Sassoon Research
Sarath Rajapakse (Head of Research)
Jessi Devadas (Research Analyst)