* SEC says no bubble yet despite surge in trading
* Regulator warns investors not to play casino with stock investments
* Forty-five companies in pipeline for listing in 3 years
* Exchange demutualisation by end 2015; listing in 2016
By Shihar Aneez
COLOMBO, May 27 (Reuters) - Sri Lanka's stock market regulator is monitoring the risk of a potential bubble forming with a surge in trading activities and amid low interest rates, the head of the island nation's Securities and Exchange Commission said on Tuesday.
Average daily turnover has risen to $7.8 million this year compared with $6.4 million last year, with stockbrokers saying lower interest rates have compelled local investors to shift funds to riskier stocks from lower yielding fixed-income assets.
"The bubble is when you go and start chasing penny stocks. That situation we don't see yet...we are watching. We keep cautioning people not to play casino and invest intelligently," Nalaka Godahewa, the head of the exchange, told Reuters.
"At the moment we do not see it as a bubble because the P/E levels are below 15 and more active stocks are fundamentally strong ones," Godahewa said.
The central bank has slashed the repurchase rate and reverse repurchase rate by 125 basis points (bps) and 175 bps to the their multi-year lows of 6.50 percent and 8.00 percent, respectively, between December 2012 to January this year.
The yields in government securities have fallen between 387-543 bps to 6.57 percent and 7.02 percent since the central bank's dovish policy stance from December 2012, leaving investors with little choice for risk-free investments.
Confidence in Sri Lanka's exchange, with a market capitalisation of $20.21 billion, plummeted in 2011 after hitting a record high of 7,863.74 points amid suspected market manipulation and insider dealings. On Tuesday, the index ended 0.4 percent lower at 6,267.44.
Godahewa said legal action has been taken out against the suspected cases of market manipulation to instill confidence. But analysts say many local investors who actively traded are still keeping away.
Godahewa said some investors are still stuck with negative margins as they invested with borrowed money in 2011 and 2012.
LISTING A CHALLENGE
The SEC's efforts to get more companies listed on the exchange have yet to bear fruit. Only a few companies have been listed since 2009 despite a surge in the stock market after the conclusion of the country's 26-year war in May 2009.
Optimism over post-war growth produced gains of 125 percent in 2009 and 96 percent in 2010, but the trend reversed with losses of 8.5 percent in 2011 and 7.1 percent in 2012. The market is still on a recovery path after edging up 4.8 percent last year and is up 6.1 percent so far this year.
The country has witnessed a sustained average economic growth of more than 7.4 in the last four years through 2013 mainly due to state-led massive infrastructure projects financed by foreign commercial loans.
However, sluggish consumer spending due to high taxes and low disposable income has compelled a lot of private companies to postpone their investments and expansion, economists say.
"Companies need to raise capital only when they grow. If the country can sustain its economic development activities and the enthusiasm among the companies, they want to grow. They will need money and they will need options of raising money through equity and debt," Godahewa said.
However, he was optimistic about overcoming the challenge of getting companies listed. Forty-five firms are in the pipeline to list within the next three years, but he did not elaborate.
Godahewa also said the SEC was in the process of valuing the bourse for demutualisation.
"Our target is end-2015 to finish demutualisation. If we can finish the demutualisation by 2015, within the next one year, it should be listed."
($1 = 130.4000 Sri Lanka rupees) (Editing by Jacqueline Wong)
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