Regulators in Colombo were woken up last week when some share prices reached dizzy highs, halted trading in these stocks and then, unfortunately (according to many in the market) enforced a blanket price curb on all stocks.
Instead of going after the suspect manipulators and errant brokers, the Securities and Exchange Commission (SEC) ordered the Colombo Stock Exchange (CSE) to implement a price ban, restricting stock prices from moving – up or down – by more than 10 %.
That it was a knee jerk reaction is clear from this week’s Business Times (BT) poll on the markets where just 56% voted in favour of the SEC decision to enforce price curbs. This means that 44 % others and probably many of those who didn’t respond or were not on the BT data base disagreed with the decision of the regulators.
Nevertheless in the absence of any meaningful intervention earlier when the markets were dangerously close to a bubble bursting, the SEC decision was probably the best in the circumstances. However there were some commissioners (non executive directors) who were not pleased with the decision as it had been taken without full board approval. No meeting was even called to discuss a major breaking event until Wednesday when the issue was discussed but no change in the decision made.
In recent weeks, the Colombo stock market has been rocked by unusual trades as low value stocks soared and in some cases ‘dead’ stocks were traded on a day much more than its listed amount. On July 25, the Business Times reported how Colombo stocks had gone berserk. “On Thursday, 147 million shares were traded in Hotel Reefcomber whereas the company has just 157.3 million shares. On July 1, 130.2 million shares of Blue Diamond were traded when it has only 102.2 million shares,” it said.
That’s the time the regulator should have stepped in although it is learnt that the CSE was contemplating price curbs the week prior to the price curbs. That would have protected to some extent Colombo’s ‘proud’ status as one of the best performing stock markets in the world. The late entry of the regulator has put a dampener on this.
Since the end in May 2009 of the war, the markets have soared with the All Share index levels gaining from around 3,000 last year to over 5,000 and heading for 6000 this year before the crash. Retail investors have taken over from foreign fund money which in fact is seen mostly moving out than in – a reflection of the concerns of institutional investors that the fundamentals in the market are still not right. Big fund managers like Jim Rogers or Mark Mobius are yet to get in and that’s also because the market is ill-liquid and gigantic stock parcels are not available for the millions of dollars they invest across Asian markets. A few funds have announced their intention to invest but are yet to make the first step other than the US-based Logan Rockefeller Global.
With retailers driving the market, the focus is on making a fast buck (a couple of thousands or millions) and little interest in long-term stays. In this scenario, investors are happy, brokers are happy making big bucks for little work (“We cannot refuse a client even if the stock doesn’t reflect its true value” – one broker confessed) and the market heads for a haywire situation like what happened last week.
Particularly worrying is that small investors (like the big guns) are now living on borrowed money: borrowing money from the banks or provided extended credit by their broker. Nice when it’s up but disastrous when a crash occurs. Then debts rise. That’s one of the reasons that agitated investors at the Matara Stock Exchange where (what was seen as) a normal glitch in the automated exchange when opening trade was delayed, let off pent-up emotions.
Another concern came from senior citizens who have dumped all or much of their life savings into stocks, moving it from initially ‘dubious’ finance companies to commercial banks, and then shifting again when interest rates fell. Some are desperately asking the President to intervene and lift the price bans so that they could take quick profits, all to gain that extra rupee to meet ever-increasing household expenses including costly tuition fees. The economic situation is also telling in another way: tax officers getting assaulted as companies and individuals find it hard to pay the dues. The latest brutal assault on a tax officer in Matara clearly though is the hand of someone with political patronage.
The Vietnam experience when the bubble burst in 2006-08 is a good lesson to follow for our ‘uneducated’ investors who ignore all fundamentals in the market (is the company doing well, does it have debt, are its directors honest and with integrity, is there proper governance, etc). In fact none of the top, respected stocks in the markets was chased in this frenzy to make money like in a luck-by-chance casino.
“This is a boom period. The market continues to break new records. There is excessive excitement in the market which still has quite loose (regulatory) management. People, regardless of an experienced investor or a housewife, rush to buy stock. They were only interested in buying without any concern to what the respective enterprise business has been doing or how the rate P/E and income is:” – extract from a report on the Vietnam stock market crash.
With markets set to take off as the economy grows in the post-war scenario, the SEC needs to be more alert, savvy against marauding investors and brokers, track unrealistic price movements and make it known that they could be tough – when needed - and also gentle to ensure market forces operate without undue disturbances. Ultimately the best regulated markets are the ones that are watched closely but allowed to operate and intervened at the first sign of trouble. On the flip side however, even the best regulators could be the worse. Take the US for example. |
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