Stock market experts weigh in on increased foreign selling and local buying

By Charindra Chandrasena
The political crisis that began on 26 October resulted in a sharp rise in purchases by domestic investors and a considerable increase in sales by foreign investors on the Colombo Stock Exchange (CSE).
According to Colombo Stock Exchange data, the daily average purchases by domestic investors skyrocketed to Rs. 1,009.73 million from Rs. 347.65 million before 26 October, while sales by foreigners have gone from a daily average of Rs. 427.43 million to Rs. 617.37 million.
This reflects the general consensus in the market that the appointment of former President Mahinda Rajapaksa as Prime Minister galvanised domestic investors, who were staying away, to invest in the CSE, while political uncertainty and international opposition brought about by the sudden appointment drove away foreign investors.
Speaking to The Sunday Morning Business, Securities and Exchange Commission of Sri Lanka (SEC) Chairman Ranel Wijesinha said that domestic investors purchasing while foreigners were selling would imply that the former are confident that the uncertainty and crisis is temporary.
“If most of the domestic and foreign investors combine, that will convey that neither have confidence in the market. But if a domestic investor is buying because a foreigner is selling, that means the domestic investor on the ground is more aware that, sooner rather than later, these uncertainties will be behind us.”
He added that the current trend is in contrast to what was seen over the past couple of years.
“In the last couple of years, we have seen good foreign participation but less local participation, which means foreign investors have more confidence in the market than we do. This is an instance where domestic investors waited in the wings to buy when price earnings multiples went down. But for every desire to buy, because there isn’t enough liquidity in the market, there has to be a desire to sell. So the selling desire, triggered by the uncertainty, has been matched by a buying desire of an eager domestic investor who was waiting in the wings for an opportunity to buy.”
Colombo Stock Exchange Chief Executive Officer Rajeeva Bandaranaike told The Sunday Morning Business that high domestic participation could lead to the return of foreign investors.
“If the foreigners see interest from domestic investors to enter the market, it’s good because they’ll gain confidence. In that sense, it is good if there are local institutional investors and high-net-worth investors – it’s a confidence booster for the market.”
However, a few brokerages speaking to The Sunday Morning Business were less enthused about the increased domestic buying and foreign selling.
A leading market analyst stated, on the condition of anonymity, that domestic buying was not entirely encouraging.
“Stocks are really cheap now and they’re getting even cheaper. It’s been happening for more than a year. Domestic or foreign, investment is a good thing. But the point is domestics are probably buying purely based on valuations and earnings expectations. So the stocks won’t go up immediately.”
Another leading market analyst opined that increased domestic buying could affect the governance quality of listed companies and exacerbate the currency crisis.
“Most of the domestic buying has been strategic, such as in John Keells Holdings (JKH). The lack of foreign interest in JKH has been matched up by domestic investors who are trying to mop up whatever of JHK they can, at a cheap price. This really affects the governance quality of these companies. This further adds to the currency crisis because we’re losing dollar liquidity in the local market, which isn’t a good thing.”
Another analyst said that the growth and performance of the market must be sustainable.
“The people who come in, if they can keep the market functioning at a sustainable level, I would look forward to that. But we don’t see that happening. It has to be at a level where the volumes are flowing at a sustainable level. We see activity peaking one day, and then we see another two weeks with minimal activity. We need to see a healthy balance between local and foreign activity. The only foreign activity we see is foreigners selling. They are nervous, and rightfully so.”