Sri Lankans exit stock market due high rates and war

They helped push Sri Lanka's stock market to life highs earlier this year, but small investors like retired bank worker K. Jayaratne are now selling their holdings because of high interest rates and renewed civil war.
Sri Lanka's stock market, which was among the world's best performers in 2006 when it rose 42 percent, has fallen around 20 percent since peaking in mid-February, after official interest rates rose to their highest levels since 2002.
The leading All Share Price Index is now down around 10 percent so far this year after local investors turned to fixed assets and deposits instead - and was Asia's worst performer during the first half of 2007.
"I have very little hope in the market. All my colleagues have left due to high interest rates and the conflict situation in the country," said 61-year-old Jayaratne as he watched share price updates on a screen in a virtually empty stock exchange.
He has sold off 64,750 rupees ($579) worth of shares so far this year, leaving him with around 500,000 rupees in blue chip fixed-line operator Sri Lanka Telecom and conglomerate John Keells Holdings, two of the market's most heavily traded shares. Many small investors rely on bank borrowings to fund their trading, and high rates have made that unviable. Some were also driven away by a new companies act that restricts bonus issues.
While central bank key policy rates are at their highest since 2002 at 10.50 percent for the overnight repurchase rate and 12 percent for the reverse repo, traders say interest rates are in reality far higher.
The benchmark 91-day treasury bill yield, which banks use as a barometer in setting their own lending rates, rose to 17.41 percent at auction this week. That is the highest level since August 2001. Fixed deposit rates offered by banks are over 17 per cent, while lending rates are over 20 percent.
"High interest rates in the financial market have compelled the retail investors to move away," said S. Umasudhan, Research Analyst at the SC Securities.
"Higher rates on borrowing have (driven away) more than 50 percent of retail investors, who kept the market active, as their portfolio value continued to drop during the past 4 months," he added. Foreign investors, however, continue to buy shares in leading blue chips, attracted by perceived bargain basement prices after the sharp fall and despite the fact the rupee is steadily depreciating through consecutive new life lows.