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.
"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. The rupee has depreciated around 4 percent so far this year to a new low this week of 111.93 per dollar. That comes on top of a 5 percent depreciation last year.
Inflation is near 1994 highs, quickening to 17.2 percent in July as measured on a 12-month moving average. Foreign investors accounted for 43 percent of net investment on the bourse in the first seven months of the year -- a total of 55.62 billion rupees ($497 million) -- which compares to 35 percent during full-year 2006.
That share of net investment has risen to 66 percent in the past three months. "Most of the blue chip counters like JKH, SLT, Dialog Telekom, Distilleries and Commercial Bank are trading at attractive price levels," said Geeth Balasuriya, assistant manager of research at HNB Stockbrokers. "That is an encouraging sign for the foreign investors."
However, analysts say the market has now largely priced in the impact of high rates and a new chapter in a two-decade civil war between the state and separatist Tamil Tiger rebels, which has seen sporadic attacks reach the capital and cut tourist arivals by 24.4 percent in the first half of the year.
While international lenders estimate the conflict shaves around 2.0 percentage points off potential economic growth each year, they also say the economy has proved highly resilient in the past.
The central bank is forecasting growth of 7.5 percent this year, which would outpace 7.4 percent growth in 2006 -- itself the fastest growth rate since 1978. Umasudhan of SC Securities expects the bourse to remain range-bound between 2,300 and 2,500 points. The market closed at 2,434.99 points on Thursday.