Sri Lankan shares gained on Tuesday as the government slashed several taxes on imports including 50 percent for motor vehicles, while the rupee closed flat as demand was offset by supply in heavy trade.

The Colombo Stock Exchange’s All-Share Price Index closed 21.64 points, or 0.51 percent, firmer at 4,258.80. It hit a record of 4,281.97 on May 21. The market is up 25.8 percent so far in 2010, making it Asia’s best performer.

Heavy retail buying has driven the bourse’s price-to-earnings ratio to 21.03, bourse data showed, compared with about 11 a year ago, when Sri Lankaended a 25-year war.

Sri Lankaon Tuesday slashed tax on imports and simplified its tax system to widen the country’s tax structure and boost revenue, which may help cut its budget deficit and continue an IMF loan.

“The tax cut boosted the market and we expect it to go further up,” an analyst, who did not want to be identified, said.

However, some analysts say the $42 billion economy’s bourse is yet to go through a major technical correction this year and retail buyers, along with state investment funds, have been pushing up prices.

Foreign investors bought a net 196.2 million rupees’ worth shares on Tuesday, data showed. They have sold a net 17.4 billion rupees ($154.6 million) worth of shares this year.

Shares in vehicle trader Diesel & Motor Engineering surged 23.6 percent to 550.75 rupees, while United Motors jumped 28.6 percent to 135.75 rupees.

The day’s turnover was 1.2 billion rupees, twice of the 2009 daily average turnover of 593.6 million rupees, but less than this year’s average of around 1.6 billion rupees. The rupee closed flat at 113.80/113.85 a dollar, as an early rise was eroded after the government’s tax reduction announcement as the market expected the rupee to fall with high demand for dollars, currency dealers said.

Bond yields were flat in sluggish trade.

“Secondary market bond yields remained unchanged,” Standard Chartered bank said in a note to investors. ($1=113.825 Sri Lanka Rupee)

FACTORS TO WATCH:

·  If government revenue increases after the new cuts in tax and simplification of tax system

·  Whether inflation accelerates due to demand-driven spending

·  When the IMF disburses the third loan tranche, which depends on whether the 2010 budget due on June 29 has the promised fiscal reform measures

·  How far retail buyers and state funds can drive up the market before a correction

·  Whether the price-to-earnings ratio falls after all March quarterly earnings are released

·  Whether foreign investors buy into fundamentally strong blue chips after the IMF loan disbursement

·  New IPOs by the island nation’s private firms

DATA

ColomboStock Exchange:

Stock Market Volume (Shares)

Current Volume Average Volume 90 Days
26,342,912 42,274,957

Yield and Price of Sri Lanka’s sovereign bonds:
Maturing year Tenure amount Reuters yield 2012 5-yr $500 5.890-5.401 2014 5-yr $500 6.711-6.463

^Reuters