Crawling Out of The Woodwork
It was only six weeks ago that the Lanka Business Review had a piece by Shamindra Kulamannage on the Colombo Bourse:
But the bubble talk proved to be a little premature. The market index did triple in a little over two years but profits at companies, as forecast by many analysts, followed the stock prices, upwards. The doomsday theorists have now faded in to the woodwork.
The doomsday theorist of the equity forum attributes this disappearance to the hardwork of the regulator. But it seems like the LBR writer spoke too soon. The doomsday theorists are crawling out of the woodwork and in droves too. Even the normally conservative Sunday Times speaks about a bubble on it’s front page.
Sri Lanka’s top regulator quit on Thursday over issues in the Colombo stock market, controlled by a few powerful interests while a credit bubble is waiting to burst, analysts said
In an editorial titled “Markets: Greed wins over integrity and accountability” the same newspaper tries to give the appearance of firing a stinging broadside at the manipulators and tries to claim moral high ground:
This newspaper has focused on these issues over the past few months constantly suggesting that interference in the regulatory mechanism was not the right way to go
The editor would be well advised to look through what the other journalists are publishing in the same newspaper; more ink has been spent presenting the point of view of the manipulators and powerful brokers than on the views of the regulator and balanced analysts. It’s sister newspaper the Financial Times is even worse.
The Sunday Island on the other hand has remembered to load the cannon balls before firing it’s own broadside.
A bubble takes place when the stock prices move far above their intrinsic values or market fundamentals. It arises in the first place because investors or the large majority of them have become speculators. An investor bases his decision to buy a stock only after examining the fundamentals of the company and considering whether the price of the stock is such as to provide him a reasonable return on his investment. The returns from a stock are the dividends and theory has it that the price of a stock should reflect the sum of the discounted values of the dividends which will be paid by the company in the future.
And how is the dividend yield at the CSE? Abysmal. Take for example Bukit Darah PLC (BUKI). The third largest listed company. It announced a dividend of Rs 2.50 per share when it was trading at close to Rs 1100. That’s a dividend yield of just 0.23% . Three month T-Bills now give a return of nearly 9%
