Sri Lanka savers warned on stock scams as interest rates fall
ECONOMYNEXT – A rise in Sri Lanka’s stocks which has sent some counters to soaring to unusual highs may leave late entrants in losses, opposition legislator Eran Wickramaratne has warned as money printing pushed rates down and drove stock and bond prices up.
Bond prices rose much earlier than stocks.
Wickramaratne, a former banker and state minister for finance, warned that people tend to invest in risky money men who offer higher rates and shadow financial institutions when interest rates fall, instead of stable banks.
When inflation rises and real interest turns negative, savers may also turn to questionable schemes.
Though they offer high yields, in the end investors lost their capital as well as interest, he said.
“So I will talk about CSE in the same manner,” Wickremeratne, a former banker, said. “Invest with knowledge, don’t lose the investment by investing without knowledge.”
In Sri Lanka periods of high inflation had also led to so-called ponzi-style scheme operated such as the one run by Danduwam Mudalali, a rural money lender who offered high returns by repaying old investors with deposits from new ones.
In 2019 inflation was 4.2 percent measured by the Colombo Consumer Price Index. Sri Lanka’s central bank has an inflation target of 4-6 percent and a floor policy rate of 4.5 percent at the moment.
But printed money has driven up excess liquidity to about 20 percent of reserve money supply and foreign reserves are being lost whenever the excess liquidity turns into credit.
Through various social media accounts people are encouraged to invest in CSE.
“Don’t go to invest by hearing only what they say, we need to look at the messenger also,” Wickremeratne said.
“We don’t have a problem If someone who has the knowledge is investing but it is dangerous to invest without having a proper knowledge,” he said.
“So we should look at it very carefully, it is not a gamble, it’s not like investing with a money lender in order to get more money, you can lose the invested money.
Analysts say the stocks to lookout in particular are low value stocks penny-stocks (microcaps) or illiquid ones (those with a smaller free float), which can be driven up easily.
In Sri Lanka there have been cases of large cap stocks with weak revenues or cashflows being pushed up, which then show high profits by re-valuing assets, some of which are held abroad under opaque arrangements.
The stocks eventually fall, which a top analyst referred to as ‘re-discovering gravity’, leaving late entrants in losses.
However some stocks may actually have value but its prices may not be reflected due to overall bad sentiment or fears about the future.
Sri Lanka’s Securities and Exchange Commission had also warned about questionable online tips and hyping of stocks.
Wickremeratne said that In the years 2011 and 2012 retailers were the ones who had to bear the biggest losses from ‘pump and dump’ scams where certain players pushed up prices of firms with weak fundamentals and then exited.
Some of the big businessmen and fraudsters purchased shares for very low prices and sold at higher prices through the Employees Provident Fund, he said.
“So when those purchase are made at higher prices, the prices in the stock market later dropsit will cause a loss to the EPF,” he said.
“So if there is retailer he will also have to bear that loss.”
He said a similar thing is happening in 2020, where about 10,000 new retailers have joined the stock market.
During the stock market bubble, fired by low interest rates, which broke in 2011 and 2012, many shares were dumped on state-managed funds.
The Employees Provident Fund came to be known in markets as the ‘buyer of last resort’ as it bought stocks at prices other investors in the market were not buying.(Colombo/Jan20/2020)