Financial Times

PA-JVP win unlikely to change economic policy

The stock market could fall sharply with a PA-JVP victory in the forthcoming election, but the Colombo bourse is likely to recover as investors realize the alliance's economic policies are not much different from the UNF's, SC Securities (Pvt) Ltd. said in a research report.

It also warned that interest rates are on the rise, despite government efforts to force them down. This would be reflected in the stock market which has historically had an inverse relationship with interest rates.

The stockbrokers advised investors to avoid panic and pick stocks with sound fundamentals.

That would pay off in the long term, unless there is a drastic change in government policy towards a left-wing ideology, which it said was most unlikely. The volatility of the Colombo Stock Exchange would continue although it is expected to stabilise with investors engaging in 'value investing'. The SC Research special report on the forthcoming elections and its impact on the market outlined three scenarios that could result from the poll. A win by the United People's Freedom Alliance (People's Alliance-Janatha Vimukthi Peramuna) would result in a "drastic drop" in the CSE, with the All Share Price Index plunging below the 1,000 mark.

"However, after passing a quiet period, the CSE would witness that the policies adopted by the UPFA are not contradicting UNF policies, thereby creating a gradual upward movement in the market based on fundamentals," the report said. Though the JVP has a very strong position in the UPFA, its secretary being a PA appointee confirms that actual power lies with the PA. "Therefore, the country is not likely to witness any drastic changes in economic and foreign policies. Further, the ministries promised to the JVP by the PA such as agriculture, fisheries, irrigation and higher education would have minimal impact on the main policies followed by the UPFA government."

The report said the JVP, which was considered an extreme left-wing party, has of late shown signs of moving towards mainstream politics with policies that were a balance between left wing and right wing ideologies.

SC Research said the vote base is divided into three main segments - one very loyal to either the UNP or the PA, the floating vote and the supporters of the minority parties. "However, history reveals that the parties which came into power were always fortunate enough to gain the support of floating voters," it said.

"Further, 'Sri Lankans have never voted a party into power. Instead, they have voted against the party in power thus bringing the fortunate opposition into power'," it said.

The emergence of Buddhist monks from the Jathika Hela Urumaya is likely to upset the historical balance of forces in the electorate, disturbing the loyal vote base of the two leading parties.

The monks could attract part of the floating vote base and obtain a considerable number of seats in parliament, the stockbrokers said. Such an outcome would prevent either of the two main parties from getting a clear mandate to form a government, prompting President Chandrika Kumaratunga to call for a national government with the participation of the two parties obtaining a substantial percentage of votes. "This outcome would be very positive for the nation as a whole and would drive Sri Lanka forward. The CSE would also benefit substantially due to improvement in investor perception and the expected inflow of funds from Sri Lankan expatriates. "Further, such a government would be in a stable position to resolve the conflict in the north and east, thereby making Sri Lanka an attractive investment destination to foreigners," SC Research said. A UNF victory, in which it forms a government with the support of the Tamil National Alliance and the Sri Lanka Moslem Congress, would create a bull run in the CSE, with the ASPI possibly surpassing its all-time high of 1,426 points.

"After a dramatic rise, the CSE would continue with a gradual upward movement backed by the improved earnings reported by companies and would react to the political outcomes to be witnessed there onwards."

However, the stockbrokers warned that the UNF government would be faced with the option of either having a cooperative working arrangement with President Chandrika Kumaratunga or impeaching her.

The practicality of the latter was "questionable" and its probability of success was "very remote".

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