No “May day!, May day!” at CSE!
- Colombo Bourse YTD gain crosses 10% mark as opposed to 20% down a year earlier
- Net foreign inflows nears Rs. 10 b milestone
- Most brokers expect market sentiment to remain buoyant on the back of policy rate cut, inflows and resilient corporate earnings though recent gains have put Bourse in over-bought territory
There doesn’t appear to be any serious distress call at the Colombo Bourse this year as it continues to gather strength much to the delight of investors and other capital market stakeholders.
In comparison to a 16% year-to-date negative growth as of 11 May last year, the Colombo Stock Exchange (CSE) is up 10.76% passing the double digit milestone on Thursday. By end May last year, the market was languishing with a 20% negative return, within the steepest fall in 2012 before ending down by 8.5%.
Reaffirming slow but steady return of fortunes, the Bourse last week gathered further strength trading at an 18-month high. The cut in policy rates on Friday by the Central Bank along with net foreign inflow nearing the Rs. 10 billion milestone as well as corporate earnings showing resilience, are likely to further cement investor confidence. Many brokers predict investor sentiments to remain buoyant though given recent gains the market fell in the overbought region by last week.
The redeeming feature was all classes of investors being active of late, though in tandem with a rebound, whereas foreigners have been smarter in picking and buying heavily when stocks were at better bargains.
John Keells Stock Brokers (JKSB) said the indices rose sharply during the week on the back of buying interest across the board, led by large caps whilst Softlogic Stockbrokers said the benchmark surged with a 237 point gain during the week with “all types of investors” back in the market.
“Broad-based positivism pushed markets over 200 points, with both retail and institutional investors showing renewed vigor,” noted Acuity Stockbrokers.
Asia Wealth Management said the market gradually continued to build up on the 6,000 levels, after falling below the 5,000 levels in August last year. The All Share Index managed to accumulate a whopping 236.8 points during the week on the back of healthy retail and institutional participation, it added.
The week started with a rally that raised the ASI index by 108 points within a day amidst a major deal (RCL acquiring 76% of Lanka Ceramics). Momentum continued for the rest of the week as well, while ASI reached its 6200 levels supported by the price appreciations of index-heavy counters such as JKH, SPEN and DIST. Momentum slowed down towards the end marginally while the week closed ASI at 6250 level, stated LOLC Securities.
Turnover value reached a 32-week high of Rs. 4.1 billion on Monday (due to Royal Ceramics and connected parties buying near 90% control of Lanka Ceramics) amid active retail participation across the board. Cumulative turnover for the week consequently increased to Rs. 10.6 billion, averaging Rs. 2.1 billion, a 107% increase from the year-to-date daily average of Rs. 1 billion, said Acuity adding “Upbeat sentiment is likely to continue in the week ahead.”
The policy rates cut by the Central Bank on Friday by 50 basis points as expected by the financial services industry though the IMF has cautioned against the move, is likely to bolster investor sentiments. With that move Sri Lanka joined the wave of rate cuts globally such as India, Australia, Vietnam, South Korea and the ECB.
The cut in Sri Lanka was largely driven by the slower than expected pick up in economic activity within the first few months of 2013due to moderate inflation and subdued demand pressure.
Acuity said markets which have been gradually pricing in a further rate cut over the past few sessions hence made a sharp jump this week ahead of the Central Bank’s official announcement of a 50 bps policy rate cut.
Asia Wealth said the cut was in furtherance of CB’s monetary policy easing stance, since a downward revision affected it in December 2012. Further, the country’s Treasury bill rates also witnessed a continuous decline over the past few weeks which could also be attributed to the expectations regarding the reduction in policy rates. During the week the three-month T-bill rates dipped by 02 bps to stand at 9.18% while six-month T bill rates also dropped by 02 bps to close at 10.20%.
“The CBSL expects the policy rate reduction to increase private sector credit growth, and improve the economic growth whilst facilitating the government to finance the public investment program at lower costs. On the back of this development, we expect the equity market to be more attractive relative to other investments modes. Thus, we advice investors to take positions on fundamentally sturdy counters with high growth potential to reap benefits,” Asia Wealth opined.
Softlogic said the rate cut is likely to bring down market interest rates in the short term.
“The rate cut is likely to shift investors away from fixed income towards other sources of investment. The move is likely to boost demand for equity investments in the medium term. We advise investors to accumulate the following companies. It is a positive signal for high debt companies with lower finance cost and banking sector counters which would benefit from margin expansion,” the broking firm added.
Lanka Securities said compared to its peers, the CSE still trades at attractive multiples indicating more room for price appreciations. However as a result of the sharp price increases during the past few days, the Bourse is trading in “overbought” territory (the 14-day Relative Strength Index is at 90). “Although valuations remain favourable traders are advised to book profits when able to. A period of consolidation is on the cards as market RSI has reached a high level,” LSE added.
DNH Financial said it expects market sentiment to remain buoyant during next week with positive investor sentiment underpinning momentum.
“However, given that the equity market has a notorious tendency to rush from one side to another in response to the ebb and flow of optimism or pessimism, we recommend investors to make a directional call, build a quality portfolio and take advantage of what is increasingly becoming a ‘stockpickers’ market. Investors are consequently advised to seek cash rich companies with strong balance sheets that have underperformed during periods of market over-exuberance and which have the upside potential to re-rate to their intrinsic values,” DNH said.
“With confidence returning to the market, we view the current market level as an opportunity for investors to reposition themselves with a flight to quality. We advise investors to break away from the herd, maintain a healthy investment horizon and focus on companies that will deliver quality earnings. On a sector basis, we believe that conventionally defensive sectors such as Telecoms could experience a slowdown in top line growth exacerbated by downward pressure on margins due to price competition. Conversely, we believe that several of the traditionally more cyclical sectors such as Banking, Services, Construction and Tourism could generate highly attractive defensive attributes, such as strong volume growth and pricing power which should enable them to maintain margins while generating sustained cash-flow. However investors may need to be highly selective focusing on stocks that are not overly leveraged or have high energy requirements,” DNH added.
Foreign net inflow as of last week year to date was Rs. 9.6 billion. Acuity said foreign investor activity recorded a net buying position of Rs. 660 million, relative to Rs. 350 million in the previous week with daily average net inflows increasing 52.59% week-on-week. Average foreign purchases increased 111.96% week-on-week. In terms of volume, Distilleries and HNB led foreign purchases, while Commercial Bank and Renuka Agri led foreign sales. In terms of transaction value too, Distilleries and HNB led foreign purchases, while Commercial Bank and Royal Ceramics led foreign sales.
Asia Wealth said foreign investors continued with their block trades in selected counters resulting in the net foreign inflow. “It could be observed that continuous foreign investor participation had been an inspirational factor for local institutional investors to be active again,” Asia added.
Dubai next stop for CSE global road show
As part of wooing further foreign investor interest, the Colombo Stock Exchange (CSE) has shifted focus on the Middle East via the region’s hub Dubai.
The next edition of “Invest Sri Lanka” Investor Forum organised by the CSE in partnership with Bloomberg will be held at the Ritz Carlton, Dubai International Financial Centre, on 3 June.
This will be the second investor road show whilst the first one was successfully held in Mumbai in February. A similar event is planned in Hong Kong in September.
Over 100 fund managers based in Mumbai attended the conference whilst nine listed firms and over 15 broking firms formed part of the Sri Lankan contingent.
For the Dubai event, the Sri Lankan delegation will be led by Senior Minister for International Monetary Cooperation and Deputy Minister for Finance and Planning Dr. Sarath Amunugama and will include Deputy Minister for Investment Promotion Faiszer Musthapha, SEC Chairman Dr. Nalaka Godahewa and CSE Chairman Krishan Balendra. Other speakers include CSE Director Vajira Kulatilaka and BOI Executive Director Investment Promotions Duminda Ariyasinghe.
Earnings season off to a good start
Earnings season has got off to a better than expected start. Based on the earnings of 19 companies which have released interim financial statements by last week, earnings have increased by over 74% year-on-year in the January-March 2013 quarter, according to Lanka Securities Ltd.