•Lb IDEVELOPMENTI SHAREMARKET REVIEW :M. H. E. Shariff: Sharif f is the Development Manager at the Bartleet Mallory Stockbrokers (Pvt) Ltd and the Sharemarket Revlewlst for the Sunday Times (for the past two years). His other contributions include - How to make money on the Stock Exchange, Strike It Rich In the Stock Market (Investment Guide) - published in the Sunday Times In 1989 & 1990. He has also lectured for CIMA and NIBM on the Stock Market. Formerly stockbroker at the Trading Floor of the Colombo Securities Exchange (Gte) Ltd, he la also experienced In trading in Commodity Features and received further exposure with visits to Commodity Exchanges in Japan and Hongkong. I he years 1989 and 1990 have been years of extremes as the Colombo Stock Exchange hit both new lows and all time highs in these two years. The year 1990 was a year of particular significance for the Stock Market with many stock prices continuing to soar most of the year until it was taken aback following the invasion of Kuwait by Iraq on August 2,1990. The impact of this scenario was felt as rem- mittances by Sri Lankans (an estimated 100,000) working in Kuwait began to shrink. Another added worry was the continuing war risk surcharge and the bunker surcharge which was imposed in stages. Other threats that emanated from this crisis included fears that local ex­ ports, particularly tea which is a major foreign exchange earner would decline. Following the outbreak of a war in the Gulf by mid January. 1991 and a ceasefire, by late February 1991, the market began to recoverfrom itsdepths once more. The heavy buying that followed had all the earmarks of a buying panic increasing the turnover registered during the first two weeks in March to Rs. 77.4 million which may exceed the turnover figures registered during the previous six months . of market activity, see table I. In order to assist in reckoning the mar­ ket direction the Colombo Stock Exchange computes on a daily basis a number of statistics. The most popular among them are the CSE All Share Price Index and the CSE Sensitive Price Index. These indi­ ces are capital weighted indices allowing the price movements of the larger com­ panies to have a greater impact on the index. Such a weighting system was adopted on the assumption that the general economic situation has a greater influence on the larger companies than on the smaller ones. In preparing the CSE All Share Price Index the whole of the year 1985 was considered the base period, although it is customary to con­ sider one day as the base date. The formular computing the index entails ad­ justments to the base year figure in ac­ cordance with Rights Issues, New List­ ings, De-Listings and Bonus Issues. In March 1987 steps were taken to con­ struct a Sensitive Price Index in order to monitor the general price trend of favour­ ite shares in the market. Therefore in choosing a basket of shares for this pur­ pose the issued capital, dividend policy, velocity of trading and earnings per share for the past three years were the criteria for listed companies, see table II. This requirement was fulfilled with the selec­ tion of twenty four blue chip companies and the base for this index too was set at 1985, and it is felt that relocations con- Table I cerning this basket of shares, will not be made till 1992. In addition the Exchange also computes on a daily basis Sectoral Indices, which in addition also takes into account relocations. During the period 1985 to 1987 the market witnessed a steady rise, of course with ups and downs inbetween, and a culmination of share prices in November 1987 with the signing of the Peace Ac­ cord between Sri Lanka and India. How­ ever as the situation in the North did not subside as was expected, share prices began to drift to very disappointing levels. As a result 1988 which started with the CSE All Share Price Index and the CSE Sensitive Price Index reading 219.22 points and 308.25 points respectively dived to as low as 136.29 points and 208.40 points by December the same year. Howeverafterthe Presidential Elec­ tion in December, the Stock Market wit­ nessed a resurgence in share prices during the tail end of the year 1988. And as the country situation remained bleak most of the year throughout 1989, share prices continued to remain depressed till October the same year. One can imagine how badly share prices had been ef­ fected if Hayleys Ltd's shares which now fetches Rs. 340/- was available at Rs.97/- after being transacted at Rs.200 in 1987. This was about the same time when John Keells Holdings sold at Rs. 15/- and Aitken Spence & Co Ltd fetched Rs. 20/-. The uptrend in share prices that was seen during the final quarter contin­ ued to persist till the time of the Gulf Crisis. The market began to pick up tre­ mendously by April on rumours that for­ eigners would soon be permitted to buy equities. This materialised in June as the government lifted the restrictions and prices continued to soar taking the mar­ ket's aggregate P/e to as much as 33 times from its earlier levels of 12 times, thus making it an overheated market with 1990 1991 August September October November December January February March (upto 15th) Turnover Rs.'OOO 3 1 8 . 0 0 0 7 3 , 1 9 7 8 1 , 1 7 9 5 6 , 3 4 4 2 8 . 3 3 3 6 9 , 3 4 1 7 5 . 7 2 2 7 7 , 4 9 8 C S E All s h a r e Pr ie s Index points 4 3 9 . 5 5 4 1 5 . 6 8 4 0 7 . 3 1 3 6 5 . 6 3 3 8 4 . 3 9 3 7 2 . 6 2 3 8 7 . 3 3 4 1 1 . 7 7 C S E Sens i t ive Pr ice Index points 7 6 4 . 0 9 7 0 8 . 9 5 7 0 2 . 0 0 6 3 7 . 3 1 6 8 0 . 3 0 6 3 3 . 9 6 . 6 5 7 . 6 4 7 0 4 . 7 4 Price/Earfngs Ratio t i m e s 3 0 . 9 7 2 5 . 3 2 1 3 5 7 1 2 . 0 4 1 2 . 5 0 12 .01 1 2 . 4 9 1 3 . 2 7 Divided Yield % 1 .78 1 .89 1 .94 2 . 0 9 2 . 0 7 2 . 0 7 1 .98 1 . 9 3 S o u r c e : S t o c k Market Daily (many i s s u e s ) . 20 Economic Review April 1991 (DEVELOPMENT. some share prices exceedingly high re­ sulting from a buying panic. The most populace sector in the Stock Exchange is the Hotel & Travel Sector with as many as 31 listed companies in this category, while the manufacturing Sector has as many as 25 companies. Unlike the Manufacturing Sector, the Hotel & Travel Sector lacks the presence of blue chip stocks. This is chiefly because the sector is extremely sensitive to exter­ nal factors and therefore has been ef­ fected from time to time resulting in dis­ rupted flow of tourist arrivals. The most recent was the impact of the Gulf War resulting in a decline of air passenger movement to Colombo. Owing to such setbacks, the shares in this sector have had very little opportunity to mature and many of them are yet in a pre-recognition phase of their respective stock growth cycles, see table III. This sector, therefore belonged in the realm of speculative stocks for many years, and investors in these shares had no track record to go by in most in­ stances, thereby making investments dicy and risky as is evident from the sectoral index. The estimates for tourist arrivals in 1990 stands at a little over 262,320 which would mean that the in­ dustry has been on an upward trend for the past three years. At present the Sectoral Index has risen to 336.14 points as on 15 March 1991. The highest drop in Table III Item Year 1 9 8 5 1986 1987 1988 1989 Tourist Arrivals N o 2 5 7 . 4 5 6 2 3 0 . 1 0 6 1 8 2 . 6 2 0 1 8 2 . 6 6 2 1 8 4 . 7 3 2 Industry Growth Rata % - 1 9 . 0 - 1 0 . 6 2 0 . 6 + 0 . 0 2 +1.1 C S E Sectoral Index points 9 4 . 5 5 8 4 . 6 3 1 2 8 . 1 0 93 .01 1 0 9 . 9 6 C S E Sec t . Index-change % - - 1 0 . 4 9 + 5 1 . 3 6 - 2 7 . 3 9 + 1 8 . 2 2 S o u r c e s : C S E Stock Market Daily & Central Bank Annual Reports - 1 9 8 7 , 1 9 8 8 & 1 9 8 9 Table IV - National Economic Data - Growth Rates 1986 1987 1988 1989 G D P at Constant (1982) Factor C o s t Prices % 4 . 3 1.5 2 . 7 2 . 7 G N P at Constant ( 1 9 8 2 ) Factor C o s t Pr ices % 4 . 5 1.6 2 .6 2 . 2 S o u r c e s : Central Bank Annual Reports 1 9 8 7 , 1 9 8 8 & 1 9 8 9 . V tourist arrivals was seen in 1987. Total tourist arrivals during the year 1987 at 182,620 recorded a decline of 21% over the arrival in the previous year which was 230,106. This was 55% lower when compared to the all time high in arrivals of 407,230 registered in 1982. Much emphasis has ben placed on improving tourism in Sri Lanka. Amongst the many developments are refurbishing hotels and renovating resorts. The Tour­ ist Hotels Association of Sri Lanka com­ prising a membership of 200 hotel units, has written to the Central Bank, request­ ing that all hotels hit by low tourist arri­ vals, be included in this bank's scheme of refinance for refurbishment. The Central Bank had excluded from this scheme hotels which had a lesserthan 10% occu­ pancy during 1990, and those with units comprising less than 20 rooms. In recent times the minimum charge on room rates Table II Arams o f S l o c k Price as on 14091 EPS NAV ROE Pie DPS Central F inance C o Ltd 1 8 5 . 0 0 16 .34 9 5 . 5 7 1 5 . 6 2 1 1 . 0 2 3 . 0 0 S h a w Wal lace & H e d g e s Ltd 8 0 . 0 0 7 . 0 8 8 2 . 3 0 8 . 6 0 1 0 . 5 9 4 . 0 0 ACME Aluminium C o Ltd 8 8 . 0 0 1 6 . 3 0 5 4 . 3 8 4 0 . 2 2 5.21 3 . 0 0 Chemical Industries (Colombo) Ltd 9 4 . 0 0 6 . 0 2 2 0 . 8 2 2 9 . 6 3 15 .61 2 . 5 0 Commercial Bank ot Cey lon U d 1 3 5 . 0 0 2 8 . 6 4 9 8 . 7 9 2 8 . 9 9 4 .71 3 . 0 0 Dipped Products Ltd 1 2 0 . 0 0 1 2 . 5 5 2 4 . 6 6 4 2 . 3 7 9 . 5 6 2 5 0 Mercantile Leas ing Ltd 3 2 . 7 5 2 . 8 4 1 2 . 9 3 2 1 . 9 6 1 1 5 3 3 . 0 0 Cey lon T o b a c c o C o U d 3 9 . 0 0 3 . 8 8 1 6 2 3 2 3 . 9 0 1 0 . 0 5 2 . 9 5 Hayleys Ltd 3 4 0 . 0 0 2 9 . 7 5 1 1 7 . 3 0 2 0 . 8 5 1 1 . 4 3 3 . 3 0 Carson Cumberbatch & C o Ltd 3 6 5 0 0 7 .46 2 9 9 . 1 7 2 . 4 9 4 8 . 9 3 3 . 9 5 Ba la S h o e C o o l Cey lon Ltd 4 8 . 0 0 2 . 6 9 1 7 . 6 5 1 5 . 2 4 17 .84 1.00 Haycarb Ltd 1 2 5 . 0 0 1 5 . 2 2 4 3 . 6 0 4 3 . 5 9 8.21 5 . 0 0 Glaxo Ceylon U d 5 0 . 0 0 3 .91 1 9 . 6 5 19 .89 1 2 . 7 9 0 . 5 0 Cey lon Brewery Ltd 1 4 6 . 0 0 5 .64 4 1 . 4 3 13 .61 ' 2 5 . 8 9 • 2 . 2 5 C h e m a n e x U d 5 3 . 0 0 3 . 2 7 3 4 . 6 9 9 . 4 5 1 6 . 1 6 1.55 Reckilt & Colman of Ceylon Ltd 8 1 . 0 0 . 5 . 2 4 18.91 27 .71 1 5 . 4 6 2 . 1 5 Hatton National Bank Ltd 1 9 5 . 2 5 1 9 . 5 8 8 9 . 8 9 2 1 . 7 7 9 . 9 7 2 . 5 0 Mercantile Credit Ltd 6 3 . 2 5 5 .56 1 8 1 . 4 2 3 . 0 6 11 .38 2 . 5 0 Cey lon Match C o U d 3 5 . 0 0 3 . 1 9 4 2 . 2 6 7 . 5 0 11 .04 1.00 Pure B e v e r a g e s C o Ltd 7 5 . 0 0 - 2 2 . 5 7 - - 0 . 9 6 Lanka Orix Leas ing C o U d 8 0 . 0 0 8 .51 2 9 . 5 6 2 8 . 7 8 9 . 4 0 4 . 0 0 S inger (Sri Lanka) Ltd 4 5 . 0 0 4 . 3 2 14 .57 2 9 . 6 4 1 0 . 4 2 3 . 0 0 Singer Industries ltd 4 5 . 0 0 3 . 2 8 1 5 . 3 2 21 .41 1 3 . 7 2 3 . 0 0 Lankem Ceylon U d 4 1 . 7 5 2 . 4 5 3 4 4 . 5 1 5 . 5 0 17 .04 - have been upped from US $ 65 to US $ 75 for five star hotels. The weak rupee with a conversion rate of Rs. 40/- to 1 US $ is also an indirect benefit to tourists who are likely to have more spending power here than in other competing South East Asian destinations. With Sri Lanka experiencing a welcome resurgence of tourist arrivals during the Winter season in 1989, Ahungalla Hotels Ltd, who own and operate Triton Hotel achieved its best ever results. The Fernweh Exclusive a prestigious Ger- Table V - Growth in Industrial output Source : C S E Fact Book. Handbook of Listed C o m p a n i e s , S tock Market Dairy. 1986 1987 1988 1989 In real t erms % + 1 2 • 8 + 6 + 6 In current t erms % - + 17 + 11 + 14 Source : Central Bank Annual Report - 1 9 8 9 . 1 9 8 7 . If W 8 . & Table VI - Growth in Industrial output in real term sectorwlse S e c t o r 1 9 8 7 1888 1989 Food , B e v e r a g e & T o b a c c o % + 3 NA + 12 Texti les , wear ing apparel a n d leather products % + 2 3 + 1 2 + 16 N o n metallic mineral products % + 11 + 5 - 6 Fabricated metal products % + 9 + 9 + 17 W o o d a n d w o o d products % + ' 4 - 1 7 NA Chemical products % + 3 + 5 - 1 8 P a p e r a n d paper products % + 1 NA 2 0 B as i c metal products % + 11 _ 2 1 - 1 1 S o u r c e : Central Bank Annual Reports • - 1 9 8 7 , 1 9 8 8 . 8 1 9 8 9 . Table VII - Industrial output, growth in real terms 1987 1988 1989 Private S e c t o r % + 1 5 + 11 + 15 PubDc S e c t o r % - 1 - 1 - 2 1 Economic Review April 1991 21 man tourist magazine rated Triton as one of the best resort hotels in the world. In addition the BMW Tropical Beach Hand' book published in 1989 rates Ahungalla Beach, as one of the twelve best beaches in the world and has referred to Triton as Sri Lanka's top beach hotel. In the mean­ while Keells Hotel Management Sen/ices Ltd, the hotel management subsidiary of John Keells Holdings is looking into pros­ pects for developing its 6 1/2 acres of land in Ahungalla. Table VIII - Composition of Exports - Percentage of total value Category 1985 1 9 8 6 1987 1988 1989 Agricultural Exports 6 2 . 5 4 6 . 3 4 2 . 4 4 2 . 8 3 9 . 2 Industrial Exports Mlnafol 3 9 . 5 4 6 . 6 4 8 . 6 4 8 . 3 5 0 . 7 mineral Exports 2 . 4 3 . 5 4 . 4 5 .6 4 . 8 Other 5 . 6 3 . 7 4-6 3 . 3 5 . 3 T o t a l . * . • • Exports 1 0 0 . 0 1 0 0 . 0 1 0 0 . 0 1 0 0 . 0 1 0 0 . 0 S o u r c e : Central Bank Annual Report 1 9 8 9 . Table IX - Export Growth In SDR terms 1988 1987 1988 1 9 6 9 Industrial Exports % - 6 . 7 + 8 . 7 + 1 . 0 + 1 6 . 2 Total Exports % . - 2 0 . 9 + 4 . 2 . - 1 . 6 + 1 0 . 8 S o u r c e : Central Bank Annual Report 1 9 8 9 . The economic framework provided by the government, particularly through its new industrial strategy has enhanced the health of the capital market. The new strategy introduced in December 1989 intends to (a) transform the import substi­ tuting industry to an export oriented in­ dustry, (b) provide greater employment and income opportunities (c) diversify the economy and strengthen the balance of payments and (d) ensure a more equi­ table distribution of income and wealth. The strategy also includes policy meas­ ures aimed at mobilising resources for investment and exports; encouraging foreign and local investments; reforming public enterprises; establishing linkages between large and small industries; pro­ moting research, training and marketing and removing administrative obstacles to investment, production and exports. The launch of this strategy has offered a se­ ries of fiscal incentives to stimulate the growth of the Capital Market. The with­ drawal of the 1 % ad valorem stamp duty on share purchases and the 15% with­ holding tax on dividends and the revision of Capital gains tax by confining such taxes to resales within one year were salient among them. On a macro scale, GDP registered a modest growth of 2.2% in 1989, see table IV. in real terms, the value of industrial output is estimated to have increased by 6% in 1989. The overall output in private sector industries recorded an increase of 15%, while that of public sector industry declined by 21%. See table V, VI. The Greater Colombo Economic Com­ mission (GCEC) which is the co-ordi­ nating body in charge of Investment Promotion Zones.(IPZs) approved 24 projects in 1989, bringing the total num­ ber of projects to 308 by the end of 1989. As at end of 1989, agreements had been , signed in respect of 178 projects, of which '118 were in commercial production. Of those projects in production, 70 were in the Katunayaka Investment Promotion Zone, 23 in the Biyagama Investment Promotion Zone and 25 in various other parts of the country. The GCEC spon­ sored Investment Promotion meetings held in Colombo during February 1991 have been a success with over 50% of the projects discussed tipped to be mate­ rialised. The investors have showed great interest in setting up their ventures in the proposed free trade zone in Koggala and projects of boat manufacturing and TV assembling are likely to commence very soon. Several leading companies are in the process of getting approval to set up their ventures in Sri Lanka. Among them are Singapore Telecom, America's AT & T, Japan's Fujitsu Electronics which is the number two next to IBM. For private sector's growth in industrial output^see table VII. An increased number of ventures in the investment promotion zones has enabled an increasing number of persons to find employment, and currently the figure stands at 61,429 in 1989 up from 1988's figure of 54,626. in the past few years the country's industrial exports has gained more dominance over other sectors, and an accelerated growth is seen in this sector in 1989, see tables VIII & IX. The National Export Development Plan for the period 1990 to 1994 says several sectors are poised for the take off and can achieve dramatically high growth rates. The report cited macro economic meas­ ures which result in high Inflation and erode profit margins of exporters. Ex­ ports are estimated to grow by an aver­ age of 11% and 13% in the five year period to 1994. The ratio of export earn­ ings to import payments has risen from 60% to 70% in 1989. By end February this year the Ministry of Finance in­ formed leading Chambers thatthe Export Development and Investment Support Scheme (EDISS) would be abolished at the end of this year* 22 Economic Review April .1991