Inflation is the cause for the rise of the Colombo Stock Exchange (CSE) in recent times, while the same reason has driven Sri Lanka to have an economic crisis, says CSE Chairman, Dumith Fernando.
Concerns have arisen as to when the country is doing relatively poor in terms of its economy, as to how the stock market on an ever growing upward trend.
Speaking at the CSE press conference on Wednesday, January 12 evening, the Chairman of the Colombo Stock Exchange stated that it was due to negative real interest rates, high inflation and emphasized that it is the companies that control the stock market’s rise.
According to the CSE Chairman Dumith Fernando, the All-Share Price Index which has considerable liquidity, grew by 80% and the more liquid S&P SL20 index grew by 60.5% in 2021.
“These figures show the underlying strength of the stock market as an asset class”, Fernando stated.
The CSE had 28 Initial Public Offerings set throughout the year. 13 Equity Listed IPOs were oversubscribed (more shares had been subscribed to than the shares allotted for the public to hold) on the first day. The rest of the IPOs on offer were debt listings.
Sri Lanka’s premier investor hub also saw a total of Rs. 5.5 trillion worth of market capitalisation, (the value of all listed securities on the stock exchange) and the market cap to GDP ratio was 36.7%.
“The fundamental purpose of a stock market in any country is to act as a place where you can facilitate the raising of capital”, CSE’s Chairman stated.
Presenting what the CSE has done for the State directly, the Chairman said that the direct GoSL revenue amounted to Rs. 7 Billion while Rs. 1.6 billion went to the state as a result of SEC cess fees.
The market did extra-ordinarily well while also acting as a Rupee-shaped hand to the State. But should the country’s economy and the market’s performance run parallelly?
However, Fernando disagrees; “We don’t set prices nor dictate prices of the market. We only set rules and regulations in the market”, Fernando said, signaling that the market is transparent and acts on its own, owing greatly to the players in the market.
He further brought up the point of negative real rates and inflation, and mentioned that stock markets, along with other asset classes such as gold and real estate (one that has been adjusted for inflation, reflecting the real cost of funds to the borrower and the real yield to the lender) tend to do well because of high inflation and negative real interest rates.
During high inflation, when raw materials become expensive, a product’s price level rises as well. However, the supplier would still prefer to retain the same profit margin (the amount by which revenue from sales exceeds costs in a business) as seen previously and as a result, investors who bought stock at a low price could sell their stock for a higher price when a company records higher amounts of profits.
The steady economic decline inversely assists the country’s stock market. Sri Lanka is currently in a state of a negative real interest rate, according to the Chairman.
This means that the inflation rate is greater than the nominal interest rate and therefore, it makes the stock market look attractive to potential and existing investors.
Fernando said that the CSE will look to grow even more in 2022 and will face its challenges successfully.
The event was graced by the CSE Chairman – Dumith Fernando, CSE CEO – Rajeeva Bandaranaike and the Board of Directors of the CSE.
