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Lankan stocks seen directionless untill parliamentary polls concluded

COLOMBO, Jan 16 (Reuters) - Sri Lanka stocks, which lost their way through a string of elections in 1999, cannot hope to find direction this year until at least parliamentary polls are concluded, brokers said.

"Nothing is going to happen until the political questions are answered. Even with improvements in corporate earnings expected, sentiment is not conducive for prices to gain," said Mevan Dimbulana of W.I. Carr/Asia Securities.

Gordon Nadesan of CT Smith Stock Brokers said: "Despite the market being cheap, investors are playing a cautious game."

The Colombo bourse was the only Asian stock market to fall in 1999, closing the year 4.16 percent lower at 572.47 points.

Sri Lanka's ruling party plans to legislate to enable opposition MPs to cross over to the government and bolster its bid to end the country's ethnic war.

If the attempt fails, the government plans to call early parliamentary elections, not due until August.

The ruling People's Alliance is seeking a two-thirds parliamentary majority to push through constitutional reforms aimed at ending 16 years of war with ethnic Tamil separatists.

A string of suicide bomb attacks by suspected Tamil Tiger rebels in the capital in the past three weeks, including an assassination attempt on President Chandrika Kumaratunga, has sent shivers through foreign and retail equity investors.

"Political risk, investors' aversion to illiquid markets have caused us to downgrade Sri Lanka to underweight from our previous neutral position," Jardine Fleming HNB Securities said in a recent research report.

"Our view on an early parliamentary election is that it would be better for the market than a later election," it said.

Brokers doubt a speculative run ahead of parliamentary polls.

"I see the market trading between 520-600 points until polls. You may however see a few individual blips," Dimbulana said.

Brokers said plantation companies, emerging winners from shortfalls in tea production in Kenya and India, could gain favour from retail investors.

Blue chip John Keells Holdings Ltd and Hayleys Ltd with interest in tea could also see buying, they said.

Prices of Ceylon tea, which wilted after its biggest buyer, Russia, hit hard times, have seen support since last September.

"We like the defensive, less liquid, high yielding mid cap segment... and favour stocks such as Colombo Dockyard Ltd CM , Tokyo Cement Co (Lanka) Ltd and Richard Pieris and Co Ltd CM ," the Jardine report said.

Colombo Dockyard builds and repairs ships. Richard Pieris markets household, industrial and agricultural products and also manages plantations.

The Colombo market, with a market capitalisation of some 108 billion rupees ($1.48 billion), accounts for a meagre 0.1 percent weighting on the Morgan Stanley Capital International (MSCI) benchmark index.

It suffers from a lack of liquidity and over-dependence on foreign funds.

But brokers are hopeful that a local issue of shares of Sri Lanka Telecom (SLT), partly owned by Japan's Nippon Telegraph and Telephone Corp, will spark interest from foreign funds and address the liquidity problem.

"Triggers for the second half of 2000 are the clearing of the political overhang... and spillover benefits of the SLT initial public offering," Jardine Fleming said.

"Our target for the Colombo all share index on a 12-month horizon is 700 points which would provide foreign investors a return of slightly less than 20 percent."

On Friday the all share index closed 0.25 percent lower at 549.61 points.-Reuters