Stock market: Expeditious implementation of structural reforms vital, say experts | Sunday Observer

Stock market: Expeditious implementation of structural reforms vital, say experts

27 October, 2019

The unveiling of the election manifestoes of the two front-runners of the presidential polls and the reduction in the Fixed Deposit rates have created positive sentiments among investors and a rally in the stock market, stockbrokers said.

JB Securities Managing Director Murtaza Jafferjee said there has been a favourable environment for equities since early July where the S&PSL20 went up 17 percent due to a combination of falling fixed deposit rates that are prompting a select group of households seeking higher returns by investing in riskier assets such as equities and speculators taking positions in the run up to the elections.

“Most of the active investors are betting on a Gotabaya Rajapaksa victory hence stocks of companies that are perceived to benefit from either more favourable policies or being able to exploit their relationship with those in power are seeing a rally, albeit from a low base,” he said, adding that there are also expectations that the promised Rs. 120 billion increase in public sector wages – half of it effective from January 2020 will boost demand hence higher earnings.

“The manifestos may provide further catalyst for specific stocks if what is being promised is more favourable to certain firms or sectors,” Jafferjee said.

Citing Lee Kuan Yew who is reported to have once said, “Sri Lankan elections is an auction of non-existing resources,” Jafferjee noted that one would have expected the polity to be much more mature than fall for empty promises nevertheless if by chance if the winning candidates tries to live up to his promises this will be a headwind for equities in the medium term for it will result in both an increase in interest rates to finance a blowout deficit and an increase in taxes to fund the promises.

Colombo Stockbrokers Association former President Ravi Abeysuriya said the stock market has shown positive sentiments historically prior to presidential elections. We have already seen an increase of prices of fundamentally strong stocks with the improvement of the market sentiment for November 16 polls.

The two front-runners for the election have indicated several structural reforms in their speeches to revive the stock market.

However, what is needed for sustainable development and proper functioning of the stock market is expeditiously implementing the structural reforms and pertinent policies such as fast tracking the passing of the Securities and Exchange Commission Act to facilitate the demutualisation of the Stock Exchange, establishment of the Central Counter Party, Delivery vs Payment System and new capital market products and services to be introduced to gain wider retail investor participation in the stock market, listing minority stakes of state owned enterprises thus expanding the potential of the market, Pension and Provident Funds to have more broadly diversified portfolios with strong fund management capabilities, brokerage industry consolidation where market intermediaries deal in all capital market products and fast-tracking the implementation of the Collective Investment Scheme (CIS) code to enable ETF and REIT and review of existing taxation framework. SC Securities (Pvt) Limited brokers said the market will pick up with the bank interest rates coming down and money infused in to the equity market.

Stockbrokers said as the market picked up after the previous presidential elections and also other elections this time too there could be an uptick in the market following interest rate cuts and other tax concessions announced in the manifestoes and the positive trend would continue for some time.

Former Defence Secretary Gotabaya Rajapaksa launched his election manifesto on Friday while Housing Minister Sajith Premadasa is expected to announce his policy framework on November 1.

Shares and the rupee gained marginally on Wednesday, as investors waited for the announcement of the policy statement from the candidates of the presidential poll.

The Rupee gained over the Greenback on Friday at 182.98 from the previous day’s Rs. 183.09 .

Meanwhile the Central Bank left its key rates unchanged after loosening policy earlier this year as economic growth is likely to remain subdued throughout the year.