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A bubble is formed when a detergent (usually soap) is blown out of proportion by something useless (air). In share trading too such a phenomenon exits. The danger of course is that all bubbles burst spilling the detergent on the floor and letting the air escape. I feel that the reason for the current slide in the stock market is somewhat similar.
The amount of money pumped into the Sri Lankan stock market is not limitless. In the past it was boosted by
1. Broker credit - sometimes up to several times the initial deposit or net portfolio valuation.
2. New entrants both foreign and local. This increased many fold following the defeat of the LTTE.
This resulted in sending the prices of the limited number of shares in the stock market through the roof. This euphoria in turn brought in more and more newcomers to the market further pushing up the prices. Everything that was touched turned to gold at the beginning.
The recent slump in the market has sent shivers through the investor community who are looking for things to blame. I feel that the following reasons are attributable to this slump and that it may actually be more long term than we think.
1. The limitation of broker credit - More the credit, more the number of shares that you buy. This causes an inflation in the price of the shares especially in a small scale market such as ours. The lax regulations on credit also meant that these shares could be held on at minimal cost. Hence the prices could only go one way - up. With credit being limited and the T+5 being strictly enforced at present, the amount of capital in our market has diminished by over 30-50%. So a corresponding drop in prices is to be expected. Is this a bad thing? Well that is open for argument.
2. Foreign outflow - There has been a net outflow of funds for quite some time now and the amount is quite considerable. These shares are now being held by Sri Lankans - which means less funds to push up shares. I have seen arguments that we do not need these foreign funds. We don't as long as additional funds come in to compensate. Every cent or dollar in the market is helping to keep the share prices afloat. Every dollar or cent that goes out of the market contributes to the drop! This coupled with the limitation of broker credit are choking the liquidity of the market. (Taking the air out of the bubble)
3. Reduced local participation - bad news in the stock market discourages potential newcomers. When is the last time that good was spoken about our market. No wonder that locals too are hesitant to join at this time.
4. Crazy IPOs - The market is seeing an unprecedented increase in the number of IPOs. These are heavily oversubscribed and take a month to come to the market. This effectively adds to the choking of the liquidity. In the past, IPOs flew through the roof and investors were able to reinvest their money in the market. However of late, the IPOs collapse on entering the market effectively trapping the retail investors. This prolongs the illiquidity of the market. This is especially true with large IPOs such as softlogic. The logic behind this is that due to the limitation of funds, the piece of bread is the same - just that there are many more mouths to feed now.
5. Manipulations - This is the final attempt at making some money when the market is down. Who wants greg or Blue when JKH is flying! When fundamentally strong shares are stagnant and are difficult to pump up, illiquid penny stocks become the target of the HNWI. Thus there is a pump and a dump with redistribution of the money in the market from the poor retailers to the rich. The retailers are hit hard and try to recover at least a fraction of their investment before scampering with their fingers burnt. Obviously this contributes to the illiquidity as well.
So my friends, the main cause of the current slump is the illiquidity in the market coupled with too many mouths to feed. I therefore do not foresee a reversal of this pattern in the near future unless the core issues are tackled. Which of these core issues to be tackled, and how to do it is for the regulators. They need to find a way of ensuring that the bubble does not burst but only shrinks to a sustainable level.
I have seen many articles promising the turn of the market with deadlines such as July 1st etc etc. Individual stocks may run (or be manipulated) but I do not think that the whole market can run together. Alas, until more money arrives in the market, this general downward trend should continue.
Be careful my friends when you hear promises of market reversals with time frames- they may be to stimulate buying while they sell off their stocks. A market cannot turn in a day. (Unless they find oil or gold)- there will be small up rallies which make the retailers believe that the tide has turned for the better, only to collapse even more damagingly.
The amount of money pumped into the Sri Lankan stock market is not limitless. In the past it was boosted by
1. Broker credit - sometimes up to several times the initial deposit or net portfolio valuation.
2. New entrants both foreign and local. This increased many fold following the defeat of the LTTE.
This resulted in sending the prices of the limited number of shares in the stock market through the roof. This euphoria in turn brought in more and more newcomers to the market further pushing up the prices. Everything that was touched turned to gold at the beginning.
The recent slump in the market has sent shivers through the investor community who are looking for things to blame. I feel that the following reasons are attributable to this slump and that it may actually be more long term than we think.
1. The limitation of broker credit - More the credit, more the number of shares that you buy. This causes an inflation in the price of the shares especially in a small scale market such as ours. The lax regulations on credit also meant that these shares could be held on at minimal cost. Hence the prices could only go one way - up. With credit being limited and the T+5 being strictly enforced at present, the amount of capital in our market has diminished by over 30-50%. So a corresponding drop in prices is to be expected. Is this a bad thing? Well that is open for argument.
2. Foreign outflow - There has been a net outflow of funds for quite some time now and the amount is quite considerable. These shares are now being held by Sri Lankans - which means less funds to push up shares. I have seen arguments that we do not need these foreign funds. We don't as long as additional funds come in to compensate. Every cent or dollar in the market is helping to keep the share prices afloat. Every dollar or cent that goes out of the market contributes to the drop! This coupled with the limitation of broker credit are choking the liquidity of the market. (Taking the air out of the bubble)
3. Reduced local participation - bad news in the stock market discourages potential newcomers. When is the last time that good was spoken about our market. No wonder that locals too are hesitant to join at this time.
4. Crazy IPOs - The market is seeing an unprecedented increase in the number of IPOs. These are heavily oversubscribed and take a month to come to the market. This effectively adds to the choking of the liquidity. In the past, IPOs flew through the roof and investors were able to reinvest their money in the market. However of late, the IPOs collapse on entering the market effectively trapping the retail investors. This prolongs the illiquidity of the market. This is especially true with large IPOs such as softlogic. The logic behind this is that due to the limitation of funds, the piece of bread is the same - just that there are many more mouths to feed now.
5. Manipulations - This is the final attempt at making some money when the market is down. Who wants greg or Blue when JKH is flying! When fundamentally strong shares are stagnant and are difficult to pump up, illiquid penny stocks become the target of the HNWI. Thus there is a pump and a dump with redistribution of the money in the market from the poor retailers to the rich. The retailers are hit hard and try to recover at least a fraction of their investment before scampering with their fingers burnt. Obviously this contributes to the illiquidity as well.
So my friends, the main cause of the current slump is the illiquidity in the market coupled with too many mouths to feed. I therefore do not foresee a reversal of this pattern in the near future unless the core issues are tackled. Which of these core issues to be tackled, and how to do it is for the regulators. They need to find a way of ensuring that the bubble does not burst but only shrinks to a sustainable level.
I have seen many articles promising the turn of the market with deadlines such as July 1st etc etc. Individual stocks may run (or be manipulated) but I do not think that the whole market can run together. Alas, until more money arrives in the market, this general downward trend should continue.
Be careful my friends when you hear promises of market reversals with time frames- they may be to stimulate buying while they sell off their stocks. A market cannot turn in a day. (Unless they find oil or gold)- there will be small up rallies which make the retailers believe that the tide has turned for the better, only to collapse even more damagingly.
Last edited by prasrod on Thu Jun 30, 2011 12:36 am; edited 2 times in total (Reason for editing : just a few commas and an alteration to the topic)
