Inflation, as measured by the point to point change in the Colombo Consumers’ Price Index (CCPI), decelerated to 16.3 % in April compared with 19.5 % in March 2007, responding to the tight monetary policy measures, according to the Central Bank in its monetary policy review for the month of May 2007. The lender of last resort (Central Bank) is confident that the ‘reserve money target’ for the month of May 2007 will be achieved. Expansion of reserve money is one of the main sources of money expansion, which generally leads to inflation.

Central Bank in its review has stated that the ‘interest rates’ have been stabilized. We are of the opinion that the statement of the bank indicates that interest rates will not be hiked further in the months to come as the bank believes the point to point inflation could be brought down to a single digit figure with the current interest rates before the year 2007 is completed.

Increase in interest rates has resulted in a liquidity shortage in the stock market, which lost over 15% during the year 2007 until May. Escalation of interest cost triggered a sell-off of margin calls, which created a market crash. Stable interest rates in the 3 rd and 4 th quarter of the year 2007 will support the stock market to gradually improve.

It was interesting to note a foreign inflow of Rs 2,330.7 Mn and outflow of Rs 1,658.9 Mn in the stock market during the week. Many of the foreign purchases were related to JKH and DIAL. Locals were identified as the sellers. Foreign investors always look for markets, which are oversold; in contrast locals will be excited in an over-bought market. Foreign participation ratio during the week stood at nearly 75% indicating strong foreign interest on blue-chips mainly JKH & DIAL.

Force selling has fuelled market crash in the recent past

In addition to the high interest rate scenario, a stringent rule applied by the Colombo Stock Market watchdog on clients’ outstanding balances led force selling in the market raising fears of further market downside.

It should be noted that the bomb blast at the Reclamation Road, which took place during the week hardly impacted on the market.

Technical experts According to experts on technical analysis, the Colombo Bourse is neither oversold nor overbought. The market was in an oversold position when it touched as low as 2,400 points and now it has come back to a neutral position.

The much-spoken divesture of 7% by Telekom Malaysia as speculated in the trading floor, nearly 5% of the issued share capital of Dialog Telekom Limited changed hands from Telekom Malaysia to another foreign party during the later part of the last week and early this week, at the market price of Rs. 27.00. However, according to the industry sources Telekom Malaysia is expected to divest another 2% from the Dialog Telekom Limited so that an eighty percent stake could be maintained.

BOI approval under section 17 has been granted to SLTL, which will facilitate duty free imports of project related capital goods in the future. We are of the opinion that SLTL will be price competitive in the future with the duty concessions. We expect either a reduction in the price of a CDMA connection (currently selling at Rs 18,000) to take place or a downward revision of call charges.

The craving to become a diversified conglomerate, Kshathriya Holdings, a listed entity of Janashakthi group has stated that it will increase the stake in Kotmale Holdings to gain control in the business, which is involved in the business of food and beverage.

Kshathriya Holdings has acquired nearly 27% in Kotmale Holding during the previous week. Nearly 8.4 Mn shares changed hands at a price of Rs 10.50 per share.

"Kshatriya Holdings Limited intends to progressively invest into the issued share capital of Kotmale Holdings Limited thereby enabling it to become a subsidiary of Kshatriya Holdings Limited," the company has expressed in a statement to the media. Kshatriya Holdings (the former Central Securities) has been acquiring several firms under its control in order to become a fully fledged diversified conglomerate.

If Kotmale Holdings is well managed, the strategic move of the Kshathriya group will contribute positively to the bottom line in the long term.

Kings Super

Moreover, the craving of Kshatriya Holdings to acquire companies continues as the group has announced to the trading floor on Wednesday ( 23 rd May 2007 ) that it has formalized an agreement with the owners of ‘Kings Super’ chain of super markets to purchase the brands, trade marks, and assets of its ten super market outlets.

The transaction is expected to conclude by the end of June. The consideration for this acquisition will be related to the valuation of assets of the super market chain. Highest ever cash call obtained shareholder approval Dialog Telekom Limited has obtained the shareholders approval for the highest ever cash call in the Colombo Bourse, which is more than Rs 15 Bn. Approval was also granted for the issue of Rs 5 Bn worth of cumulative preference shares. Telekom Malaysia, which was recently forced to sell off nearly 5% of Dialog Telekom Limited, has stated that it will not bring down its stake below 80% in Dialog Telekom Limited.