Market driven by speculation

OVERALL market slipped marginally during the week despite significant gains made by few speculative counters. Market opened on Monday shedding 12.4 points and thereafter fluctuated within a very narrow range.

The ASPI (All Share Price Index) lost 4.2 points or 0.16% to close at 2620.3 points while the more sensitive MPI (Milanka Price Index) sank 19.4 points or 0.55% to close at 3535.3 points.

Topping this week in terms of turnover was the forestry counter Touchwood, continuing to hold its dominance for the second consecutive week. Investor interest on the counter enabled 1,824,000 shares to be traded within a price range of Rs.127 & 152 per share.

Touchwood share closed at Rs.151.25, showing a sizeable increase of 15.24% from last week’s Rs.131.25.

Subjected to speculation, Ceylon Leather saw over 3 billion of its shares changing hands, which was responsible for Rs.208 million or 14.4% of total market turnover.

The counter traded between Rs.53 & 78 per share gaining an impressive 26.5 % WoW to close at Rs.71.5 per share.

Blue chip JKH closed flat at Rs.130 rupee. Over a 1.4 billion shares of the firm were traded adding over Rs.188 million to turnover.

During weeks trading JKH share price reached a high of Rs.130.75 per share and a low of Rs.128 per share.

Investor interest was also seen in the hotel sector counter Pegasus Hotels, contributing Rs.62 million of turnover to reflect 4.3% in weekly market turnover - fourth largest for the week.

The counter closed up 13.25 rupees becoming the top gainer for the week with price climbing by a significant 75%.

Market experienced low activity compared to last week suggesting lesser investor participation with activity levels amounting to Rs.1.45 billion, down by 72.1% compared to last week’s closing level (Trading this week was limited to four days only) Meanwhile the average daily turnover dipped 65.1% to stand at Rs.361.9 million.

Foreign investors remained net buyers for the week standing at Rs.217.9 million. Foreign purchases were substantially down by 83.2% to Rs.340.9 million while foreign sales too witnessed a similar reduction of 84.6% to stand at Rs.123 million. Out of total activity 16.02% was foreign participation, which stood low, compared to 27.32% last week.

Heavily traded stocks for the week were Nawaloka, Ceylon Leather, Ferntea Ltd and Pegasus Hotels.

Point of view

Market remained somewhat volatile during the week with activity levels hovering around 360 million on a daily average basis. Week on Week (WoW) market lost ground marginally with ASPI falling by 4.2 points compared to last week’s closing levels.

In the week ahead we expect market to remain fairly active with retail investors continuing to play a dominant role.

Furthermore as expected by us, interest rates showed signs of easing during the week and we feel that market would get a boost if rates continue to decline in the coming weeks. Therefore we advise investors to selectively collect undervalued counters with strong fundamentals.

Economy Update

The exports, which grew at a healthy pace during the 1st 7 months of 2007, slowed sown in August as industrial exports declined by 16% YoY. Meanwhile the Balance of Payments (BOP) continued to slide to stand at US $ 81 million by end of August 2007.

Exports during August 2007 declined by 9% to US$ 667.8 million compared to US$ 734 million recorded during the corresponding period last year. The YoY drop in exports can be partly attributed to the unusually high export earnings during the corresponding period last year (August 2006) following a labour unrest at the Colombo harbour in July 2006.

In August 2007 the industrial exports dropped by 16% amid a 22% decline in the export earnings of textiles and garments. However agriculture exports increased marginally by 3.1% YoY. Meanwhile imports recorded a 1.1% decrease YoY to US$ 983.1 million during August 2007.

The drop in imports was mainly due to the lower consumer goods imports that fell by 10.2% compared to August 2006.

Nevertheless petroleum imports YoY increased considerably by 25.8% to stand at US$ 260.9 million. A faster decline in exports compared to imports resulted an expansion in the August 2007 trade deficit by 21.1% to US$ 315.2 million as against US$ 260.4 million during the comparable period last year.

Meanwhile cumulative exports (Jan to August 2007) in 2007 increased by 11.7% YoY to US$ 4,926.8 million while cumulative imports increased by only 3.5% to US$ 7,048.4 million resulting in a significant drop in trade deficit by 11.6% to US$ 2,121.6 million compared to US$ 2,400.5 million in the corresponding period last year.

Furthermore cumulative worker remittances increased by 17% YoY to US$ 1,758 million.

Slide in BOP continues

Despite a healthy trade performance and worker remittances, the BOP continued to slide for the fourth consecutive month to stand at US $ 81 million by the end of August 2007.

Therefore the BOP that stood at US $ 292 million at the end of April this year has reduced by US $ 211 million over the last four months.