Blood on the trading floor
Wisdom ex post facto or the wisdom of hindsight is a given for all time in this world of ours. That’s what we are seeing on the Colombo Stock Exchange (CSE) now bouncing (or is it limping?) back to life after Monday’s disaster when it lost 84 billion rupees in a matter of secondsThat was when it re-opened after its March 20th closure on account of the Covid lockdown. Brokers and analysts feared that this prolonged closure, against the trend worldwide, on the directive of the Securities and Exchange Commission (SEC), would mean a loss of confidence by foreigners who had invested in the Colombo bourse. When there is heavy foreign selling, the herd instinct takes over and that is what we saw with locals too following suit.
Undoubtedly the SEC was the messenger of a decision taken higher up and it would not be fair to ‘shoot the messenger’. Nevertheless was it an informed decision to keep the market closed for days and then weeks, eventually running into a prolonged seven-week closure? The whole world is affected by the corona pandemic, but was any stock market closed for as long as Colombo? We think not. While what happens in London, New York or Tokyo may not be altogether relevant to tiny us, what’s happening in our neighborhood. particularly in frontier and emerging markets do matter; and we have to be plugged on to such developments. As the Covid scare took root, most if not many markets closed but not for as long as we did. This is why market players as well a brokers and analysts, maybe with wisdom ex post facto, are saying that our closure was far too long. They accuse market regulators of being shortsighted and brokers of being fear-stricken. Of course there is no gainsaying that if what happened in the Welisara navy camp occurred in the World Trade Center (where the CSE is located), the song would have been different. Nevertheless there is a ring of truth in the assertion that what was good for the bond market which continued operating would have been good for the stock market too.
Much water has flown under the bridges since share transactions were conducted in what the Colombo Share Brokers’ Association of the day termed the ‘Call Over’ system. The number of listed companies then were a small fraction of what prevails today. Not more than a dozen transactions were concluded per day in those pre-technology times of long ago. This was particularly so after the land reforms, when the Colombo incorporated, but largely British owned, quoted plantation companies owning mostly tea and rubber estates, went out of business.
But conditions have since dramatically changed both here in Sri Lanka as well as the wider word outside. Today the CSE, among the first local institutions to go high tech, has nearly 300 listings and transaction values sometimes run into billions of rupees per day. It is not only a small elite of investors who participate in the share market now, but a large number of players who are by no means rich, who invest in and trade in shares. Literacy in market practice and prospects abound. Brokers have set up offices in a few towns out of Colombo to cater to investors who do not live in the capital. The Colombo Share Market has had its ups and downs in recent decades including periods when it looked like a lottery with no losers. That induced many new players to invest in shares rather than keeping their savings locked in the National Savings Bank then paying interest that was a fraction of today’s rates.
As everybody knows, when the post-Covid extended market closure ended and the CSE was back in business, the market plunged as never before to a fraction of its previous value. That was easily predictable as foreign investors in Sri Lankan shares, exposed to a double-edged sword of plunging share prices and exchange rate depreciation, looked to either exit or reduce exposure. As a result there was a build-up of pent-up selling pressure that powered the crash. But for the circuit breaker system that applies an automatic brake in trading when market value plunges fast and furious, the CSE would have literally ended in the pits. Less blood than on Monday was shed the following day when the market fall was less steep. On Wednesday and Thursday (when this is being written) things looked brighter with some recovery on the broad All Share Price Index and less steep decline in the S&P 20 Index covering mostly liquid blue chips.
All but the worst pessimists believe there must be some sort of recovery that is likely to go in tandem with the Covid-19 situation improving. A reverse would catalyze convulsions in many areas of the economy including the share market. There is likely to be pressure either in the short or more probably medium term for institutional investors like the EPF and ETF to support the market. Given what has happened in recent years when these private sector retirement funds made bad stock market investments, sometime at the behest of politicians and at others due to corruption, managers of these funds will be reluctant to invest other people’s money in stocks and shares. That is not surprising given the many accusing fingers we have seen pointedin recent years. While circuit breaker systems, which in this instance was a lifebelt for the Colombo market have their uses, there is expert opinion that they should be used skilfully rather than what the Sinhala idiom calls kokatath thailaya or one cure for all. Be that as it may, let us hope that last week’s dramatic events did not deal a death blow to what is called retail investment in the Colombo share market.
Wisdom ex post facto or the wisdom of hindsight is a given for all time in this world of ours. That’s what we are seeing on the Colombo Stock Exchange (CSE) now bouncing (or is it limping?) back to life after Monday’s disaster when it lost 84 billion rupees in a matter of secondsThat was when it re-opened after its March 20th closure on account of the Covid lockdown. Brokers and analysts feared that this prolonged closure, against the trend worldwide, on the directive of the Securities and Exchange Commission (SEC), would mean a loss of confidence by foreigners who had invested in the Colombo bourse. When there is heavy foreign selling, the herd instinct takes over and that is what we saw with locals too following suit.
Undoubtedly the SEC was the messenger of a decision taken higher up and it would not be fair to ‘shoot the messenger’. Nevertheless was it an informed decision to keep the market closed for days and then weeks, eventually running into a prolonged seven-week closure? The whole world is affected by the corona pandemic, but was any stock market closed for as long as Colombo? We think not. While what happens in London, New York or Tokyo may not be altogether relevant to tiny us, what’s happening in our neighborhood. particularly in frontier and emerging markets do matter; and we have to be plugged on to such developments. As the Covid scare took root, most if not many markets closed but not for as long as we did. This is why market players as well a brokers and analysts, maybe with wisdom ex post facto, are saying that our closure was far too long. They accuse market regulators of being shortsighted and brokers of being fear-stricken. Of course there is no gainsaying that if what happened in the Welisara navy camp occurred in the World Trade Center (where the CSE is located), the song would have been different. Nevertheless there is a ring of truth in the assertion that what was good for the bond market which continued operating would have been good for the stock market too.
Much water has flown under the bridges since share transactions were conducted in what the Colombo Share Brokers’ Association of the day termed the ‘Call Over’ system. The number of listed companies then were a small fraction of what prevails today. Not more than a dozen transactions were concluded per day in those pre-technology times of long ago. This was particularly so after the land reforms, when the Colombo incorporated, but largely British owned, quoted plantation companies owning mostly tea and rubber estates, went out of business.
But conditions have since dramatically changed both here in Sri Lanka as well as the wider word outside. Today the CSE, among the first local institutions to go high tech, has nearly 300 listings and transaction values sometimes run into billions of rupees per day. It is not only a small elite of investors who participate in the share market now, but a large number of players who are by no means rich, who invest in and trade in shares. Literacy in market practice and prospects abound. Brokers have set up offices in a few towns out of Colombo to cater to investors who do not live in the capital. The Colombo Share Market has had its ups and downs in recent decades including periods when it looked like a lottery with no losers. That induced many new players to invest in shares rather than keeping their savings locked in the National Savings Bank then paying interest that was a fraction of today’s rates.
As everybody knows, when the post-Covid extended market closure ended and the CSE was back in business, the market plunged as never before to a fraction of its previous value. That was easily predictable as foreign investors in Sri Lankan shares, exposed to a double-edged sword of plunging share prices and exchange rate depreciation, looked to either exit or reduce exposure. As a result there was a build-up of pent-up selling pressure that powered the crash. But for the circuit breaker system that applies an automatic brake in trading when market value plunges fast and furious, the CSE would have literally ended in the pits. Less blood than on Monday was shed the following day when the market fall was less steep. On Wednesday and Thursday (when this is being written) things looked brighter with some recovery on the broad All Share Price Index and less steep decline in the S&P 20 Index covering mostly liquid blue chips.
All but the worst pessimists believe there must be some sort of recovery that is likely to go in tandem with the Covid-19 situation improving. A reverse would catalyze convulsions in many areas of the economy including the share market. There is likely to be pressure either in the short or more probably medium term for institutional investors like the EPF and ETF to support the market. Given what has happened in recent years when these private sector retirement funds made bad stock market investments, sometime at the behest of politicians and at others due to corruption, managers of these funds will be reluctant to invest other people’s money in stocks and shares. That is not surprising given the many accusing fingers we have seen pointedin recent years. While circuit breaker systems, which in this instance was a lifebelt for the Colombo market have their uses, there is expert opinion that they should be used skilfully rather than what the Sinhala idiom calls kokatath thailaya or one cure for all. Be that as it may, let us hope that last week’s dramatic events did not deal a death blow to what is called retail investment in the Colombo share market.
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