Has the Colombo Stock Exchange missed the bus?

By Madhusha Thavapalakumar

It is finally happening. The Colombo Stock Exchange (CSE) last week told stock market stakeholders that it “intends” to recommence trading on tomorrow (11), which will bring to an end seven weeks of inactivity that began with the imposition of islandwide curfew on 20 March.

In the days leading up to the initial closure of the CSE on 16 March, the CSE’s circuit breaker was activated multiple times after the Standard and Poor’s Sri Lanka 20 (S&P SL20) index, which includes the 20 largest companies by total market capitalisation listed on the CSE, fell by 5% slabs several times, triggering 30-minute halts in regular trading. The following week, it remained closed for four days with the Government declaring holidays. It was opened only on Friday (20 March) that week and that too for a shortened trading time. Since then, it has remained closed.

What can the CSE expect once it opens? There is general consensus that there will be a “bloodbath” with a massive sell off by foreign investors who have been waiting anxiously for seven weeks to pull their investments out. The statistics bear out this fear, as the CSE suffered a net foreign outflow worth Rs. 473 million in the five-and-a-half days it was open before the current closure.

However, there is less agreement on how the market would perform in the short to medium term, with some analysts and market insiders hopeful of a recovery and others bracing for an extended period of losses.

Therefore, we decided to take a look at some other frontier markets such as Sri Lanka which have been affected by Covid-19 but have been open for a while or were never closed. This is to ascertain how the CSE would perform over the next month or two since opening tomorrow.

What are frontier markets?

The hierarchy of investing comprises three types of markets with developed markets such as the US and the UK being on top, followed by emerging markets such as India, Pakistan, Russia, and China. Frontier markets such as Sri Lanka, Nigeria, and Kazakhstan are at the bottom of this hierarchy.

Frontier markets are less advanced capital markets in developing countries that are established far better than those in the least developed countries (LDCs), but are not as developed as markets in emerging economies. Therefore, frontier markets can still be recognised as “pre-emerging” markets.

Nevertheless, what makes these frontier markets at the bottom of the hierarchy better, according to global analysts, is the fact that they are less vulnerable to external shocks due to their limited financial links with the rest of the world.

There are about 30 frontier markets mostly in Africa, the Middle East, and Asia. These markets have a combined market value of $ 715 billion. Sri Lanka is one of the four frontier Asian markets.

Frontier markets’ outlook

As reported by Forbes, frontier markets in general are at greater risk of being upended by coronavirus, although certain countries and sectors may have opportunities for patient investors, according to a Dubai-based fund manager.

“Frontier markets, loosely defined as those emerging countries that fall outside of the Brazil-Russia-India-China (BRIC) sphere, are as a general rule be less prepared to deal with the Covid-19 crisis than their counterparts in the developed world (sic),” it reported.

Overall, 2020 is expected to witness lower than historical GDP growth in Asian frontier markets, which is a phenomenon not restricted to Asian frontier markets but extends to most major developing and developed markets as well. However, it is believed that the lower oil price will be a tailwind for most Asian frontier markets as this will help manage inflation and interest rates and can support the recovery of growth in 2021.

The frontier rally


Hanoi Stock Exchange

Vietnam is a frontier market and has two stock exchanges namely the main Ho Chi Minh Stock Exchange (HOSE) along with the smaller Hanoi Stock Exchange (HSX). HOSE is the largest stock exchange in Vietnam. The Ho Chi Minh VSE is a major stock market index which tracks the performance of 303 equities listed on the HOSE and HSX in Vietnam. It is a capitalisation-weighted index. The VN-Index has a base value of 100 as of 28 July 2000.

Vietnam reported its first Covid-19 case on 23 January this year. By this point, most of the Asian stocks were subdued owing to the rising death toll in China. The benchmark VN-Index plunged 31.88 points, or 3.22%, to 959.58 points on 30 January, the biggest losing session since November 2018. 274 stocks lost and just 80 gained on the HOSE, on which the benchmark VN-Index is based, as trading opened after a one-week Lunar New Year break.

On 3 February, VN-Index fell 8.48 points, or 0.91%, to 928.14 points, its lowest point since 11 February last year. This was the third consecutive session that Vietnam’s benchmark index fell since it reopened after a one-week Lunar New Year break.

Vietnam stock market kept plunging. The benchmark VN-Index on the HOSE took a nosedive to close at 835.49 points on 9 March, recording the worst slump since 2002. However, by 17 March, the cash flow into Vietnam’s 30 biggest stocks narrowed the VN-Index’s losses to 0.28%, from above 0.9%, in four previous sessions, reversing the plunging trend of almost two months. 

The VN-Index recorded a remarkable recovery on 25 March, surging 4.71% to 690.25 points, its biggest single-day gain since 24 July 2009. Reuters reported on 30 March that Southeast Asian stock markets rose as China factory activities were expanded in March after contracting to a record-low in the previous month.

By 1 April, the VN-Index surged 17.7 points, or 2.67%, to 680.23, with nearly all of Vietnam’s 30 biggest market caps in the green. Following this, almost all the blue chips in the market gained for three consecutive sessions. On 10 April, with just one new Covid-19 infection recorded in two days, the VN-Index surged 4.98% to 736.75 points, its biggest single-day gain in 19 years, which was remarkable. 

Led by blue chips in general and banking sectors, VN-Index kept rising even by the end of April, showing stronger signs of recovery, recording decade high gains in its VN-Index.


Bahrain Bourse is one of the frontier markets of the Middle East. As at 2017, 42 companies were listed on the exchange. The exchange operates from Sunday to Thursday. Three indices track the Bahrain Bourse: Bahrain All Share Index, Dow Jones Bahrain Index, and Estirad Index.

Bahrain as of Tuesday (5) had 3,533 Covid-19 cases reprting eight deaths. Bahrain confirmed its first Covid-19 case on 21 February and the first death was reported almost a month after. Following the first Covid-19 patient, Bahrain’s index dropped by 0.5%. By end-February, Bahrain Bourse hosted workshops for Kuwait-based companies, explaining opportunities at Bahrain stock market.

However, by 1 March, Bahrain’s Bourse edged down 2.1% but rose by 2.2% the following day. The Bourse again witnessed a 5% drop by 9 March. It kept dropping in the subsequent days and as a result, Bahrain Bourse announced temporary closure of its trading floor to the public as a preventative measure until further notice. However, the following day was Thursday after which usually Bahrain Bourse closes trading for three days. When the bourse was opened on Monday, 22 March, Bahrain Bourse was down marginally.

Even during early April, Bahrain Bourse was trading in red as they were trading marginally lower. However, this trend saw a reversal since 12 April as the Bahrain Bourse was trading in positive territory, rising 0.23%. On 19 in the same month, Bahrain Bourse increased 0.6% to 1,320 points.

United Arab Emirate (UAE) stocks, which includes Bahrain Bourse, posted straight sessions of gains since mid-last month as governments continued to take colossal strides to help keep their economies afloat amid a ravaging pandemic and a slump in oil prices.

The sectors partially reopening and a surge in oil prices helped Bahrain Bourse to a stable trading compared to a month ago by the end of April. Other stock markets that remain open in the Middle East, which are also on their recovery paths including Kuwait and Oman. Oman stock exchange was too back in the green by late last month.


Morocco is a North African frontier market. The Casablanca Stock Exchange of Morocco is the third largest bourse in Africa. The Morocco Casablanca Stock Exchange’s MASI Index is a major stock market index which tracks the performance of all companies listed on the Casablanca Stock Exchange. It is a free-float, capitalisation-weighted index.

Morocco, as of Tuesday (5), reported over 5,000 cases and 180 Covid-19 deaths. The country reported its first Covid-19 case on 2 March. The stock exchange, which was very much dynamic during the early weeks of this year, plunged into an unprecedented panic, recording the largest daily decline in its history on 9 March.

The Moroccan All Shares Index (MASI) lost 5.82% of value on Monday alone, reaching an all-time low of 10,806 points. It is one of the two main Moroccan indexes, the other being the Moroccan Most Active Shares Index (MADEX). The drop was purely attributed to Covid-19.

However, by the end of March, the Casablanca Stock Exchange managed to be one of the best performances in the region of the Middle East and North Africa with notable gains.

Meanwhile, another frontier market in the African region, Nigeria, too managed to gain a considerable number of days since the last week of April. It is notable that the Mauritius frontier market too remained open despite the spread of Covid-19 within the country.

Market closures – good or bad?

While most of the stock markets remain open despite the spread of Covid-19 in their respective countries, Sri Lanka and Bangladesh have stood out for keeping their markets closed for extended periods of time.

The seven-week “closure of the Colombo Stock Exchange will likely affect short-term sentiment towards Sri Lankan equities once markets do re-open as selling pressure would have built up”, said Ruchir Desai, a fund manager at Asia Frontier Capital Ltd. in Hong Kong, speaking to Bloomberg last week. Some foreign investors had raised their concerns about the extended closure via intermediaries to the regulator, Desai said.

Local market analysts pointed out to The Sunday Morning Business that this prolonged closure is harmful to investor confidence and may deter foreign investors in the future, as they will have no guarantees that they could pull out their investment when they wish to. Furthermore, we learnt that retail stockbroking companies have had no revenue whatsoever for over a month which has severely impacted their cash flows, even putting in doubt its ability to pay salaries.

International market analysts had expressed views on whether a stock market should remain open during a pandemic.

CFA Institute Director of Capital Market Policy – India Sivananth Ramachandran

CFA Institute Director of Capital Market Policy – India Sivananth Ramachandran says closing markets is not a well-thought-out reaction. Speaking to a foreign media, the institute stated closing the markets will not change the reality but will send wrong signals to investors.

A financial sector law firm based in Mumbai, Finsec Law Advisors, told an Indian news report that the markets are a reflection not just of the past, but also a mirror of the success of the companies in the future. 

“Hiding this crystal ball because it is showing an unpleasant future is like hiding a thermometer because you have high fever. It will actually provide false comfort that you are healthier, even though your symptoms are getting worse,” the firm added. 

European Securities and Markets Authority (ESMA) President Steven Maijoor a month ago had noted that stock exchanges should remain open during a pandemic. He is of the view that stock markets are vital for the functioning of an economy and financial systems, especially in the current circumstances. 

Safeguards in place

When the CSE opens tomorrow, it will have a new system under which the market will automatically close for the day if the S&P SL20 index drops by 10% or more, according to the Securities and Exchange Commission of Sri Lanka (SEC) which regulates the CSE.

Under the current system trading is halted every time the S&P SL20 drops 5%, with the market closing for the day if it drops 5% at or after 2 p.m. The new system has done away with this 2 p.m. mark, allowing the market to be closed as early as 12 noon if the S&P SL20 drops 10% or more. 

The Three-tiered Circuit Breaker structure is as follows:

. First Circuit Breaker – after commencement of trading of the CSE for the day, a market halt to be imposed for 30 minutes in the event the S&P SL20 index drops by 5%.

. Second Circuit Breaker – having re-commenced trading after the cooling off period of 30 minutes following the S&P SL20 drop of 5%, if the S&P SL20 index drops again by another 2.5%, a market halt to be imposed for another 30 minutes.

. Third Circuit Breaker – upon re-commencing trading subsequent to cooling off period of 30 minutes following the S&P SL20 drop of 2.5% (altogether S&P SL20 has dropped by 7.5%), if the S&P SL20 index drops by a further 2.5% (S&P SL20 index has fallen altogether by 10% for the day), trading will be halted and the market shall be closed for the day.

The SEC said it has deemed it necessary to amend the current methodology by introducing a Three-tiered Circuit Breaker structure having taken into consideration the prevailing market conditions.

“Accordingly, a Three-Tiered Circuit Breaker structure is hereby introduced in order to strengthen the capital market and ensure that precautionary measures are in place to eradicate distortion in the S&P SL20 Index by providing a layered approach.” 

It remains to be seen how often this circuit breaker system will be relied on by the CSE in its first few days of trading. However, what is more interesting is how the market would perform over the few weeks following this expected initial selloff. Will it capture some of the resurgent spirit shown by other frontier markets, or has it been kept closed for too long to expect such a recovery?

Only one way to find out.