All noise, no signal

The Economist recently ran a contest inviting readers to submit captions. One of the winners was “All signal, no noise”. While the Economist remains one of the few publications that could attempt to justify such a claim, for most media the opposite remains staunchly true. Turning news into human interest stories and easily digestible sound bites is hardly a local phenomenon. Lankans much like our Asian neighbors are more interested in drama than in content. In no sphere is this more evident than in politics. School going children, well below voting age, can trace the evolution of most mainstream political parties and their leaders. Most Westerners, hardly able to name their cabinet of ministers are stunned by this perceived ‘political literacy’. Our post-independence development trajectory however suggests that this hasn’t translated into effective policies. The heightened interest only seems to have led to an increased noise ratio, as politicians eagerly cash in by finding fresh slogans for everything.
This feedback loop is not limited to politics. The expectation of a post war economic boom brought a flood of investment into the local stock market. Fast behind the initial wave came the retail investors, dazzled by the opportunities the booming market presented. In the speculative rally that ensued market noise blinded many to the underlying strong signal the peace dividend presented. Instead of investing in conglomerates with strong balance sheets that could leverage growth or the financial services sector that would capture the leading edge of the growth wave, money flowed to volatile mid-cap stocks. Many a stock market advisor, incentivized and trained to be impervious to noise got carried away in those heady days.
Markets have historically displayed an ability to self-correct. Noise can mislead but rarely cause complete disruption. The wider economy on the other hand can only take so much noise before it becomes a cripplingly disruptive factor. The apathy of the local private sector currently faced with many mixed signals seems to indicate just that.
The stock market has been languishing for the past few years. Locals who bullishly poured into the market during 2010-11 have all but given up. Meanwhile foreigners who have historically been the ‘smart money’ have been buying, sending foreign holdings to record levels. With the opposition in disarray the government never had a stronger hold on power, but has curiously slumped to its lowest approval ranking, according to many analysts. Despite being ranked as one of the best travel destinations in the world, the number of inbound tourists already seems to be plateauing.
In this backdrop rather than reducing noise and uncertainty, the actions of the ruling coalition is having the opposite effect. The cabinet is contemplating tax concessions for casinos, while minority parties of government coalition vehemently oppose all gambling related investments. Some of these same forces are associated with anti-Halal campaigns and foreign milk powder boycotts. Such shows of apparent self-contradiction have impaired the government’s ability to provide a clear signal regarding future policy. Dissent is to be expected within such a diverse political coalition, but current noise levels have created a murky environment indeed for business. Transparent media reporting backed by incisive analysis could restore some balance to this setting, but the exodus of veteran journalists and policing of media by the government has left media in a sorry state to play this role.
Despite the general gloom a few early movers such as John Keells Holdings (JKH) are moving ahead with big investments. JKH’s investment is to be financed by the largest rights issue in history of the local market, which has been snapped up by investors in apparent self-contradiction of their own gloomy outlook. The private sector has been slow to borrow despite interest rates dipping and the business confidence index has been on a continuous downtrend. So does this mean that JKH and a few select heavy weights are seeing the gold through the gloom? Only time will tell. For the moment, should the government run a caption contest, it’s likely to receive decidedly less flattering entries than the Economist.

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