Fluctuations in the share market: Bulls, Bears and Tigers
The fluctuations in the share price indices are indicative of the uncertainties in the security situation. With every slight expectation of peace, the indices rise. Similarly with every indication of terrorist activity, like the killing of soldiers, the indices decline.

The shedding of over 500 points in the All Share Price Index, since the day prior to the election is due to fears of a resumption of war and thereby a setback to the economy as well. Last week the market shot up owing to new hopes of peace generated by the visit of the US Under Secretary of State Nicholas Burns, the revisit of Erik Solheim and Anton Balasingham. When these hopes are seen as being realised the market will boom, if they seem to be dashed to the ground, a bear run would begin.

The perceptions of all investors are not alike and the indicators of peace or war are also confusing. The one thing certain is that market sentiment is very much dependent on the security situation. The stock market behaviour is very much a reflection of the aggregation of these sentiments. One may be tempted to say that the price behaviour in the Colombo Stock Market has little to do with fundamentals of the shares and that market sentiments override evaluations of stock performance. That however would be correct on the surface of things. In actual fact, there is a relationship between the perceptions on security and the performance of the corporate entities. Some firms in the stock market would be more directly affected than others.

These include shares that are heavily dependent on tourism. Tourist traffic is much dependent on the security conditions and therefore hotel shares would reflect the perceptions on the peace front much more clearly. Some hotel shares are hedged to an extent owing to their ownership in more diversified economic activities, yet their performance recently indicate that their prices have been influenced somewhat more than their exposure to tourism. Such is the anxiety of investors.

Apart from such direct influences there is the perception that were the security situation to deteriorate, other economic activities too would be disrupted. There could be increases in costs directly and indirectly owing to the war situation. The market for some commodities would be adversely affected. As it happened in the past it is possible that freight rates and insurance rates would be increased. Perhaps the most pervasive impact may occur through macro economic changes. Increased costs on the war would mean that the fiscal deficit would rise. This could lead to increased taxation as well as increase in the interest rate coupled with higher inflation.

All these factors would have an adverse impact on corporate profits and therefore it is reasonable for investors to be vary about holding shares in companies. A slide in the share market is likely on reflection of these factors.

The reasons for the share market to exhibit a degree of stability and not slide completely are several. First there is the different perception that investors have of the situation. Second there are the fluctuations in the political situation that varies from despair to hope. Statements of all sorts abound and these lead to different perceptions of the future. Then there are actions like the all-party conference that lead to expectations of peace. Strong statements from foreign powers also enforce such confidence. The presence of Erik Solheim in the country trying to commence peace talks as well as the visit of the US Under Secretary of State has inspired confidence at this moment and the market gained a few points. In the past such expectations have been short-lived.

Speculation of the outcome on peace and war is an important reason for the up and down situation in the share market. When shares dip there are those who want to buy to make a gain when market sentiment is reversed. Then there is the all-important factor of foreign investors.

They would have different designs. Some foreign investors are excessively sensitive to the security situation and would prefer to bail out. Others would see the dip in share prices, as an opportunity to buy fundamentally sound shares cheaply. Their interest may well be in the long run and so they would buy into good stocks expecting long-term profits. This has been happening recently and is an important factor in stabilising prices. Conversely, there are also investors who have laid out policies that when shares fall below a certain range that they would sell to cut losses. Such policies tend to make the market spiral downwards. In recent months the aggregation of these sentiments has lead to a net outflow of foreign funds than an inflow.

There is an important body of thinking that even if the problem is not resolved, that there would not be all out war. They contend that war weariness due to it being costly in lives and money and realism that such an exercise would not led to a resolution of the problem, ensures that an all out war is not likely.

Another underlying reason for this line of thinking is that the international war on terrorism makes the terrorists refrain from larger actions that would cause provocations particularly from western powers. The government places much reliance on this line of thinking as assuring a no war no terrorism status. This has lead to a degree of confidence in the economy, as contained terrorism would only result in a partial setback to the economy.

The stock market is not the economy. The segment of the economy that is covered by the stock market is indeed a fraction of the total economy. Yet it is a barometer of confidence in the economy that influences foreign investment in particular. It has implications for the balance of payments. It is an indicator of the confidence that an influential section of the people have on the expected turn in the direction of the economy.
The performance of the stock market is very much dependent on the expectations of peace.

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