In the recent past our stock market has witnessed a sharp decline culminating in a free fall on 23rd October with a loss of 85 points representing drop of 4.7% The all share index which recorded 1815 was a 31/2 year low. In a recent article following factors have been highlighted by the author for the financial turmoil in developed countries including USA and EU.

(0 1) Sub prime loan

(02) Credit crunch

(03) Recession

It has been stressed that factors (01) and (02) have no relevance to our stock market and our country would be least affected due to the recession in developed countries.

(A) Recession Factor

It is observed that stock market have been plummeting in many developed countries due to recession fears in the past 2 weeks and it is worth analyzing the salient features.

(1) Many developed countries in Asia such as Japan, Taiwan, South Korea, Singapore have export driven economies mainly to USA generally consisting of cars, electronic items etc., which are considered luxury. On the same basis some countries in Europe such as U.K, Germany, France and Italy would be affected

since drop in volumes and prices would lead to closure of factories and job losses.

(2) Countries such as Australia, Russia, Brazil, Canada etc., would be effected as main suppliers of raw materials due to reduction in volumes and prices. Russia in particular is badly affected due to price decline of oil.

(3) Countries such as China and India expected to record growth of 9.3% and 6.9% respectively for 2009 according to ADB reports have received massive foreign funds in the past had seen large withdrawal of funds by hedge and mutual funds due to redemption requests by customers. Resulting sharp decline of market in this case is not due to 3 factors affecting developed countries.

Consequently most of the developed countries are either in recession or would be in recession from the current quarter. In fact on 24.10. 08 England has announced a negative growth of 0.5% for the 3rd quarter after 16 years. It is therefore expected many quoted companies dealing with motor vehicles, luxury consumer items, petroleum products, building materials etc., along with financial institutions would record losses or substantially reduced profits from the quarter ended 30th September 08. It is not surprising that a price decline of these shares would drag down respective stock markets further.

In comparison our country which recorded over 6% growth from 2006 is expected to record similar growth in 2008 and 2009. In fact our growth for 2 quarter is 7%. Our main items of exports such as tea, coconuts, garments, fisheries products etc., are essential and would be fully absorbed locally and abroad. However price reduction of our exports is logical as experienced at present with buyers as in other commodity markets reducing buy orders in order to bring down the prices.

This should be viewed in the context of decline of oil prices from dollars 147 to around 65 which amounts to over 50% decline. Considering the fact oil imports account for 1/3 of our imports the country would be in a position to save around dollars 1300 M annually. It is a considered view that the gain would more than compensate the impact from decline in prices of our export items. In addition prices of our imports including food items, such as wheat, sugar and fertilizer are expected to decline and positively impact trade balance.

It should be noted that 85% of our quoted companies including financial institutions generally would not be affected from the recession mainly in the developed countries. Due to the above average performance in the first half even plantation companies despite decline of tea and rubber prices still expected to record a satisfactory growth during current financial year.

(B) Immediate steps necessary for the revival

(1) Telecom and Dialog the highest capitalized companies which have significant impact on the index had declined 28% and 73% respectively and authorities concerned should persuade foreign major share holders to defend the current price levels by increasing their shareholdings. It is very advantageous and prudent for the foreign investor of Telecom to buy at current level which is around Rs. 13 less than the price paid to acquire substantial portion at Rs. 50.50 which would reduce average cost. Similarly JHK which had declined almost 70% from all time high should be defended at present price level by further buy back arrangements from the company. The company has already announced buy back of 4% at a price of 90 to be operated from 4th November 08. Similarly Ceylinco, CF LB and Stassen Groups etc., should be persuaded to defend price levels of their quoted companies by increasing shareholding of subsidiary companies who have controlling interest. It is important to note for the purpose of maintaining company image and obligation to protect minority share holders this matter should receive immediate attention. This should also be viewed in the context where even governments of USA, UK, France etc. today buy equities of many banks to protect stock markets. Above named companies have immensely benefited from investors through the stock market in the past and this is an ideal opportunity to show little gratitude in return.

(2) The government should arrange financial institutions such as government banks including NSB, ETF etc., to involve more in the equities. For instance increase of even 2% of the EPF and ETF funds would have a substantial impact and would give attractive return in the medium to long term

(3) In the earlier article recommendation has been made to increase the present margin of 50% to 65% and forced selling from 60% to 75% for a short period as a temporary measure. It should be noted sharp decline of prices during the past few days created a situation where even an investor with a comfortable margin of say 30% going over 60% and losing due to forced selling. Had the regulatory authority taken a prompt decision this situation could have been arrested and prevented losses to many retail investors. Since this is an exceptional situation which require exceptional solutions a decision in this regard could have been taken at a emergency board meeting. Since the market has dropped substantially balance 25% at worst level would ensure no risk to the brokering companies. Further except for a very few such companies are either subsidiaries of banks and cash rich conglomerates such as Orix Leasing, JHK etc,. Further this enhancement could be made optional so that it would be left to the respective brokering companies to implement it based on their requirements.

(4) Majority of the stockbrokers are committed to develop the stock market but a few had failed to realize that this is not a forum to promote political agenda of opposition parties. A person may have a political affiliation, but nowhere it is seen affecting other economic activities such as banking, insurance, industries, agriculture, other service sectors. Etc,. It is not uncommon they even spread exaggerated or imaginary information among other brokers and investor public which are adverse to stock market. The print and electronic media should be careful in obtaining their comments. Even a handful expect a change of regime to activate the market not realizing the fact the ASI peaked under the present government in 2006. Primary duty of stock broker is to promote the stock market with dedication and commitment which is their bread and butter whilst safeguarding the interest of their clients. This type of attitude is unprofessional, unethical and self destructive and it is the considered view such persons should not be in the business of stock brokering.

The party in power which historically was not strong in economic management and economic development has completely turned around and since 2005 engaged in a massive infrastructure development projects including Roads, (Colombo-Matara, Katunayake- Colombo, Colombo-new network), Power (upper Kotmale, Norachchlai, Sampur, Kerawalapitiya), Ports (Hambantota etc.,) Irrigation (Moragahakanda, Uma Oya etc,.) whilst pursuing a campaign to eliminate

terrorism in a professional manner which even opponents of the government grudgingly now

admit.(C) Lone Term trategies:

1. Reconstitution of SEC and CSE boards, It should be stressed regulatory authorities and brokering companies are financed by the stock investors and therefore most important factor in the stock market. The retail investors constitute 98% of the investor community running in to a few lakhs and benefits derived by them are more beneficial to the economy and for distribution of wealth. In fact if one analyse the balance sheet as at 31.03.07 of two State Commercial Banks, pillar of strength is millions of small savings depositors who have saved Rs. 267 billions and not the affluent class. Accordingly it is essential two directors each appointed to both Colombo Stock Exchange and Securities and Exchange Commission from the retail investors to look after the interest of the retail investors.

Such appointees should be knowledgeable, educated, courageous, acceptable and should have time to devote fully in this regard. Such persons should not be a mere rubber stamp and responsible only to the retail investors.

2. Customer Lobby:- Customer auditorium at Stock Exchange head office has been closed few months back after many years of operation. This was a forum where many investors gathered and engaged in healthy discussions which ultimately benefited entire brokering community and lakhs of investors. It is a well known fact thousands of brokers and investors used to contact those at the auditorium daily for the latest information on stock market. We are now informed that Kurunegala auditorium too has been closed. The retail investors are unanimous, the auditorium is essential and closed not for security reasons. The retailers feel this may be due to change of attitude after the resignation of two eminent persons, namely M/s Rienzie Wijetileke and Eraj Wijesinghe who were always concerned for small investors.

As suggested CSE should make arrangements to open an auditorium outside Pettah and Fort with parking space which could be even partly funded by stock brokering companies. As market strategy similar facilities should be established at Galle, Ratnapura, Kegalle and Anuradhapura etc.

3. There is immense potential in provinces in mobilizing deposits for the stock market and it is the considered view this opportunity has not been properly exploited.

4. Due to impending recession countries such as USA reduced prime rate by 50 basis point to 11/2% recently with a view to stimulate the economy and this could be ultimately reduced to even 1/2%. At present flow funds are moving towards USA even from countries such as China and India due to other factors. However once the volatility in the financial market is stabilized this trend may reverse and countries in Asia such as India, China, Malaysia, Sri Lanka not unduly subjected to recession would be attractive and the brokering community should obtain maximum benefit at the appropriate time.