When a stock market takes the kind of kidney punch that Colombo has just suffered, what does an investor do?

Mr. Chandra Wijenaike, the chairman of the Central Finance Group, has expressed some thoughts on the subject in the just released annual report of Central Securities Ltd., the Central Finance associate owning a portfolio of quoted shares.

"In an uncertain investment environment, the best course of action for a stock market investor would be to remain invested in fundamentally sound shares, with a reasonably good liquidity.''

He said that the fund managers of Central Securities, which in the financial year 1996/97 made Rs. 9.8 million provision for the fall in market value of investment, was following this investment policy.

"Within the constraints of liquidity, the investment strategy has been to shift the investments to fundamentally sound shares having above average growth potential, with the medium to long-term objective of realising a sustained stream of future capital gains,'' he said.

Wijenaike has told his shareholders that the performance of the company had "improved considerably'' in the period under review with the turnover improving to Rs. 9.9 million from Rs. 8.7 million the previous year.

The earlier pick-up in the stock market enabled the company to reverse Rs. 2.3 million of the provisions made for the fall in market value of its portfolio the previous year and post a net profit of Rs. 6.5 million. This compared with the loss of Rs. 2.3 million the previous year - a development Wijenaike called "a major improvement.''

Given profits of Rs. 17.9 million available for appropriation and the company's liquidity, the directors have recommended a first and final dividend of 10% for the year under review, up slightly from the 8% dividend paid the previous year.

Wijenaike said that the stock market which had remained positive up to April this year turned adverse in May with the nuclear tests on the subcontinent changing the entire regional picture. The sharp decline in the market was accompanied by large foreign outflows as international investors pulled back their investments in Asia.

"The outlook for Asia is clouded not only by the nuclear threat prevailing in the subcontinent, but also by the general economic downturn which is a direct consequence of the Asian economic crisis,''; Wijenaike said.

Pointing out that the Colombo market cannot sustain a high level of activity without foreign investor support, he said that the aggressive pull-out of foreign investors from the subcontinent caused a decline here as Colombo is heavily dependent on the spillover from Indian markets.

"Blue chip stocks were the worst hit as a result of the foreign exodus. In the sort-term, the possibility of a sustainable market appreciation remains unlikely as foreign funds continue to keep away from subcontinent markets,'' Wijenaike said.

On the plus side, he said that the outlook for continuous improvements in corporate earnings remained positive. But he felt that the percentage improvements this year could be less than the previous year with lower average prices expected for tea and rubber exports as well as the downturn in tourism arrivals.

"The real improvement in earnings is likely to stem from improvement of productivity of corporates. The political climate is also likely to play a major role in the business confidence during the current year as the government appears to be bracing itself for an early presidential election,'' Wijenaike said.

During the year under review, Central Securities made a trading profit of Rs. 2.5 million, down from Rs. 3.3 million a year earlier. However, the reversal of provisions in a sum of Rs. 2.6 made for the fall in market value of investments the previous year, boosted the net trading profit to Rs. 4.8 million against a Rs. 6.6 million loss the previous year.

With other income of Rs. 1.7 million on account of interest earnings and no tax liability, the company's bottom line read Rs. 6.5 million against a net loss of Rs.2.3 million the previous year.

The directors of the company are Messrs. C. Wijenaike (chairman), S.V. Wanigasekera, M. Dharmaraja, E.H. Wijenaike, T.M. Dunuwille and J.K. Weeratunge.