Business Times

Rising market cap – Are we seeing the real picture?

The Colombo bourse’s market capitalisation is rising only because share prices are soaring, analysts said, noting that growth in capitalisation based on share prices is neither a good sign for the market, nor sustainable.

Nikita Tissera, Head of Research Sampath Securities agreed, saying that the Initial Public Offerings (IPO) seen in the post war period have added negligible value to the real growth of the share market.
"It’s the price inflation to most part that is responsible for the rise in the market cap and the market has not ‘broadened’.

But some analysts said that this happens in almost all markets which is seeing such a phase as the Sri Lanka. “The usual trend, as is also evident in Sri Lanka is that there is a problem of large demand and very limited supply and a matter of 235 listed companies to choose from when buying.

However, there is a large amount of money coming in from foreign investors (who are looking for exposure to the emerging economy of Sri Lanka) as well as local money coming in from people and funds who can no more earn 20% interest from fixed income securities. This demand/supply mismatch drives share prices and the market capitalization higher leading to irrational valuation at times,” explained Deshan Pushparajah, Manager Corporate Finance Capital Alliance PLC.

However, he also noted that this trend is usually mitigated when supply starts coming into the market encouraged by such valuations, adding that is what the share market is slowly seeing now.
“An increased number of companies issuing new shares by way of IPOs, existing companies conducting substantial Rights Issues etc, suck up the excess liquidity in the market which dries up the excess demand,” he said.

He noted that in the medium term share prices (valuations) will come down to more rational levels but the market capitalization may remain at current levels or slightly higher due to a higher number of listed companies and/ or larger capital bases of existing companies.

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