Financial Times

Small cap bubble yet to burst
By Duruthu Edirimuni
Negative returns from money market instruments and comparatively low price-to-earnings ratios for the overall stock market are continuing to drive share prices but the bubble created by the artificial rise in low capitalisation, low value stocks is expected to burst soon.

The Colombo bourse is still undervalued with a PE ratio of 13.1 despite being one of the world's best performing bourses, stock market analysts said. The PER of 13.1 means that for every one rupee of earnings of a company, investors are willing to invest Rs. 13.1.

Tushan Wickramasinghe, Managing Director, Lanka Orix Securities Company (Pvt) Ltd., said as long as present inflation levels and high oil prices remain, the market will not be overheated.

"The market is drastically undervalued, because in 1994, with a raging war, the PER was 25 and today the forecast PER in the market is 11," he said, adding that the market has much more room to grow.

"In 1994, the treasury bill rate was approximately 20 percent and now it is at eight percent, making investors' net return down by 12 percent," Wickramasinghe said.

He said that by investing in such fixed income instruments, the investors stand to erode their funds by half. "The consumer price index shows 15.5 percent and by investing in treasury bills for five years, the investors will have a net loss of 50 percent, at the end of their investment," he added.

The All Share Price Index (ASPI) recorded a growth of 359 points, or 23.8 percent so far this year, while the Milanka Price Index grew 538 points or 25.9 percent. However, some stockbrokers are concerned about small cap shares showing a faster rise during the last few months.

"The price levels cannot be justified when you look at the fundamentals of certain stocks, but now the market is mainly driven by the sentiments of investors and demand and supply," said Manjula Kumarasinghe, Head of Corporate and High Networth Markets, Asha Phillip Securities Ltd.

"The investors are concerned about the positive aspects in the country like the absence of war risk, the peace process and they are prompted to invest in the CSE due to the low returns on interest rates compared to the inflation in the country," he said, adding that the index has risen 20 percent in the past four months, to more than 1800 points, even after the tsunami.

Dimuthu Abeyesekera, CEO, Asha Phillip Securities Ltd., said certain shares appear to be overheated, but not the overall market. Namal Kamalgoda, Chief Investment Officer, Eagle NDB Fund Management Company Ltd., said the market is not overheated because the majority of the ASPI consists of fundamentally sound stocks such as John Keells, Sri Lanka Telecom, Lanka Indian Oil Company, Commercial Bank and Aitken Spence.

Kamalgoda said that investors, stockbrokers and the trading public at large are forced to think in the short term, because of the unsound political environment in the country.

"We should see some kind of a meltdown on low valued stocks soon, as these are overheated and will run out of steam," he said, adding that it is a case of investors making hay while the sun shines.

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