Will Geneva act against Bourse?

Monday, 31 March 2014 00:00 - - {{hitsCtrl.values.hits}}

By First Capital Equities Research In a sign of further intensification of political pressures on Sri Lanka, the US-sponsored resolution on Sri Lanka was passed at the 25th Session of the United Nations Human Rights Council (UNHRC) in Geneva with the support of 23 countries. However, 12 countries, including China and Russia continued to extend their support to Sri Lanka.

Meanwhile 12 countries, including India, which previously supported the resolution for an independent investigation into Sri Lanka’s alleged war crimes abstained from voting. Although the US and EU stand firm in their belief of war crimes committed in the last phase of the Sri Lankan civil conflict and the on-going human rights violations, many foreign delegations in the post-war period who visited the former conflict zone have commended the progress in reconciliation efforts by the Sri Lankan Government. With the UNHRC resolution bound to cause some concern among investors about Sri Lanka’s future in the economic and political spheres, we reiterate that any possible impact will be experienced in the long term when the investigation concludes and its findings revealed. Negative impact on trade account Among the strongest possible impacts of the UNHRC resolution on Sri Lanka is its impact on the external trade sector. During the previous two months, Sri Lanka witnessed a growth in export earnings and consequently a contraction in the trade account deficit. With the US and EU being among Sri Lanka’s largest export markets (US and EU account for 85% of textile and garment exports in January 2014) we expect any measure adopted against Sri Lanka is likely to curtail exports to these regions and consequently have an adverse impact on the country’s trade account balance. Further, with the resolution shedding a negative light on Sri Lanka we can expect a possible reduction in tourist arrivals and FDI flows into the country. Bullish market outlook remains However in an encouraging sign, despite limited advances being witnessed in the bourse, market momentum continued to improve gradually with the ASPI reporting a gradual yet steady advance in the ASPI in the past few weeks. Despite the threat of the Geneva resolution against the country, Sri Lanka continued to attract a high volume of foreign inflows into the country while also witnessing an increase in retail activity. The months of January and February 2014 witnessed high foreign outflows although the trend reversed in the month of March which saw a pickup in foreign and retail activity. It is noteworthy that the increase in foreign and retail activity during the month occurred against the backdrop of the Geneva resolution thus indicating strong positive investor sentiment.

With the bourse moving along an upward track we expect the bourse to cross the 6,000 resistance level in the coming days with a high volume of retail activity providing the necessary impetus. Sri Lanka will stand firm With investor confidence remaining resilient despite global political pressures, we expect the bourse to continue to gather steam as we head further into the year 2014. On a global platform with firm support from selected counters and their continued investment and contribution to the Sri Lankan economy, we believe Sri Lanka would remain firm and continue to enjoy economic expansion and market growth in the future.