Share market analysts pin down overvaluation of the stock market as the primary reason for its fall in the past year but say that lack of policy stability such as currency devaluation and the expropriation law are also a source of concern. They say future growth in the market will largely depend on these two factors.
“There's nothing to be worried about when the market falls as it is natural. Market is overvalued when it goes to 20 times earnings so it has to go through a natural process of correction. The economic fundamentals still remain strong in the market but the policy stability (Government and Regulatory) is a concern," Deshan Pushparajah, Manager Corporate Finance, Capital Alliance told the Business Times.
Many say that while they won't comment on appropriateness of policy, there have over the last few months been serious inconsistencies in policies at various levels. “We need this to settle down for a few months before we invoke foreign interest again. Policies that harm business confidence currency have also been a major negative,” an analyst noted.
Mr. Pushparajah pointed out those recent fears of a further devaluation of the currency pose a further threat for foreign investors to come in. “They would rather hold a wait and see attitude on the developments within the country,” he said.
But he also noted that markets over 20 times valuations are considered expensive but it doesn't mean that they cannot be attractive. "There could be situations where higher multiples would not deter investors buying, given that there is strong growth or a super macro opportunity in the market," he explained further.
He also pointed out that for Sri Lanka the economic indicators display improving performance, but that doesn't mean that economic performance cannot be better.
Exchange rate phobia
Further in the recent past few adhoc policies may have dampened investor sentiment, especially the under utilized asset take over bill and currency devaluation, the analyst noted.
Others say that we are just another country competing for portfolio and Foreign Direct Investments (FDI). “Similar to any investor the foreign investors - let it be portfolio or FDI-, would want profits and advantageous positions for themselves. Therefore at the point of entry they would want a weak rupee and at exit would want a strong rupee for the selfish reason that they want to maximize their dollar returns. In such a case the rupee devaluation has adversely affected the prevailing foreign investors but it also entices fresh foreign money to enter the island,” Dhanushka Samarasinghe, Director Research TKS Securities told the Business Times.
However, other analysts said that the fear factor amongst the overseas investors is the future exchange rate policy of the island.
Predictability and consistency
“Any investor likes predictability and consistency whilst they would like surprises only if they are positive. Therefore in the current context possibilities of future rupee devaluation would only delay foreign investments since overseas investors would want to see the local currency bottom out for them to enter the country,” Mr. Samarasinghe noted. He also added that with the change in the rupee defence, a stronger local currency strategy followed by the Central Bank is the only way to maximize the potential of overseas investments would be to allow the free float of the currency.
“Then there would be no ambiguity concerning exchange rates; the investors would be able to absorb the risk rather than face the additional risk of changing economic policy,” he said. He also noted that the free float of the currency opens a new paradigm of risks associated with global hot money flows. "Then Sri Lanka would no longer be (somewhat) decoupled from the global economy as it has been in the past," he noted.