PBJ'S pep talk fails to prop market

Tuesday's meeting with Treasury Secretary Dr. P.B. Jayasundera and stock market stakeholders propped the market on Thursday but as many analysts predicted it was 'short lived’ euphoria as Friday saw the indices slumping with low turnover.

"It's imperative that the sentiments improve, but that cannot be done merely by dialogue. There has to be a 'tangible' solution," a CEO of a stockbroking firm told the Business Times. He said that the meeting with Dr. Jayasundera saw discussions on how all stakeholders should uplift the bourse, credit rules were promised to be reconsidered and the government pledged to help revitalize the market and help brokers improve their capacities, risk management and market development.

"He tried to make the brokers feel good, but nothing really came out of it," he said.

He added that the fact that retail investors - most particularly and even some high net-worth clients - have lost the trust and the confidence in not only certain investment advisors, but also in the entire stock market should have been discussed at length.

A broker told the Business Times that now they can extend credit as much as three times their net capi- tal, which equals to a company's total liabilities deducted by its total assets. The problems started when the Securities and Exchange Commission (SEC) changed the computation of the net capital earlier this year. It's now called the adjusted net capital a rule which they want outwhere the brokers were required to deduct 50% of the debtors from the net capital, if their clients' credit go beyond trading day plus 30 days (T + 30).

He said that relaxing this rule isn't the only thing to boost the market, a point which 'all' brokers agreed with.

"We want to increase participation in the stock market to make it more vibrant. What we submitted to the Treasury are the things within 'our' control and which can boost the market and make it vibrant," he said, adding that this can bring retailers into the stock market.

The SEC says that some 28 brokers have already given Rs 3 billion credit so far and there's Rs 6.9 billion available. "The credit given at present is Rs 6.9 billion. The SEC suggested that they can relax the credit rule to liquid and illiquid shares, which the brokers aren't happy with. "The SEC says that more than thrice the net capital if the brokers get their act together in terms of implementing risk management systems and credit controls," an industry source said. The regulator has been behind them for a while to get these implemented, but the brokers want state assistance as these systems are costly.

Brokers refute the Rs. 6.9 billion credit, saying that this is what’s available to ‘all’ brokerages. “Some firms don’t grant credit. So what’s left for those who do lend is minimal,” a broker said, adding that a proposal to grant credit in a simple manner, where brokers can give thrice their net capital without deducting debtors but have a requirement to provide for 100% for any impairment of the collateral value of shares was discussed at the recent meeting.

Amongst the many reasons that can be ascribed to a slump in the market, excessive credit extended to unwary investors, questions about the independence of the regulator and most strikingly the recent bad press about 'governance issues' at state- owned funds and the reliability of stock broking firms are few that needs mentioning, the source said. To compound matters further, allegations of market manipulation and insider trading has exacerbated an already bad situation. Genuine investors have been squeezed out and do not want to come into a market they perceive as rigged, corrupt and pandering to a handful of powerful investors.

Ravi Abeysuriya, CEO Heraymila Securities noted that some errant investment advisors have become greedy and extremely shortsighted where they have forgotten that in the investment profession "client interest" should come first and they should at all costs avoid getting into situations where even a perceived conflict of interest is apparent. "But it is sad to note that quite a few of our investment advisors have no idea of client interest or ethics for that matter," he added, pointing out that when an industry loses credibility with the public, it's also the professionals go down with it.

Noting that in this demanding situation it is imperative that the duty to lead the 'investment business' out of this crisis falls first on those with the highest levels of expertise, professionalism and ethical standards, Mr. Abeysuriya called for a bolder voice for professional ethics as there has never been a greater need to conform to a robust code of moral principles. "In 2010, all that an advisor had to do was to pitch any stock and it goes up the next day. Investors got very greedy, fueling further greed and leading to stocks being grossly overpriced, which created a bubble," he said, adding that now in a bid to stem their losses, investors have moved out of stocks in search of less risky fixed deposits.

This get-rich- quick mentality makes it hard to maintain gains and keep to a strict investment plan over the long term, especially amid such a frenzy, Mr. Abeysuriya said.