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Sep 28, 2010

Sri Lanka's Stock Rally May Enter `Blow-Off' on Stock Splits, Nomura Says


Sri Lanka’s stock rally may enter a “blow-off phase” as stock splits help draw individual investors to the world’s second-best performer this year, according to Nomura Holdings Inc.

The Colombo All-Share Index has climbed 103 percent this year, the biggest gainer after Mongolia’s MSE Top 20 Index among 91 global benchmark indexes tracked by Bloomberg. The gauge has tripled since the end of a 26-year civil war in May 2009 on optimism that the government will be able to focus on economic development and draw investment.

Commercial Bank of Ceylon Plc, the nation’s biggest private lender by assets, is among at least 12 companies that have announced share splits this year, Nomura said. The splits, along with rising share prices, have helped boost trading, with average daily turnover surging about 63 percent this quarter from the first half, according to data compiled by Bloomberg.

Sri Lanka’s “improved economic performance has not gone unnoticed by local investors or by listed companies,” analysts at Nomura led by Sean Darby wrote in a report. “The equity market is beginning to exhibit signs of ‘froth’ as stock splitting becomes more widespread to encourage retail investors to return.”

The rally in Sri Lankan stocks has been underpinned by accelerating economic growth, increased foreign investment and lower interest rates. The nation’s $42 billion economy may grow as much as 8 percent in 2010, the Central Bank of Sri Lanka said on Sept. 21, faster than an earlier forecast for a 7 percent expansion.

Borrowing Costs

Governor Ajith Nivard Cabraal has slashed the reverse repurchase rate by three-quarters of a percentage point since early July, taking advantage of low inflation to bolster the economy. That contrasts with central banks in India, Malaysia and Thailand, which have raised borrowing costs this year to check inflation or prevent asset bubbles.

Darby said Nomura first initiated coverage of Sri Lanka with a “bullish” stance on Oct. 15. The market will continue to outperform its peers within markets covered by MSCI Inc., the analyst also wrote.

To contact the reporter on this story: Shiyin Chen in Singapore at schen37@bloomberg.net To contact the editor responsible for this story: Linus Chua at lchua@bloomberg.net

Courtesy - Bloomberg

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