Sri Lanka is run by a shaky Marxist-backed minority government, the island's peace process is in tatters with Tamil Tiger rebels warning of war, but the country's stock market is racing.
The tiny Colombo Stock Exchange (CSE) hit an all time high at close Friday to emerge Asia's best performer this year and the fourth in the world, according to the CSE.
Retail investor speculation is said to be driving the bullish performance in the absence of fundamentals to back the gains in the past three months.
Sri Lanka's rupee has lost nearly seven percent against the US dollar this year and inflation and interest rates are on the rise after record falls since 2002.
"Aggressive retail investor speculation on low priced shares... has been responsible for most of the top gains, with retail exuberance increasing by the day," Asia Securities said in a report.
The market has been recording gains in the indices since 2001 when a market-friendly right-wing government was elected. The ASI index appreciated 38 percent during that year. In 2002, the market put on 31 percent, while in 2003 gains were limited by political turmoil in November when President Chandrika Kumaratunga sacked three ministers in the government of her rival Prime Minister Ranil Wickremesinghe.
However, the market still posted an overall 30 percent growth last year. This year, growth up to the close of trading Friday was 35.6 percent.
A broker at CSE said the behaviour of some investors was difficult to fathom. He said even domestic institutional investors appeared to have shed their more cautious approach to remain on the right side of the price curve.
The Norwegian-backed peace process remains on hold with diplomats warning that the recent escalation of violence despite an Oslo-brokered truce that has been in place since February 2002, could push the country back to war.
"We maintain our view that the country's economic fundamentals have weakened over the past three months amidst a gradual rise in interest rates, faster currency depreciation, increasing inflationary pressure and slow down in investment," Asia Securities warned.
However, Sri Lanka's market is so tiny that a few large transactions could have a topsy turvy effect on the entire bourse.
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