First Capital recommends higher equity exposure; tips ASPI to grow to 12,000 points in 2023

First Capital is recommending a shift to listed equities forecasting the benchmark All Share Price Index (ASPI) to reach 12,000 points in 2023.

In an equity strategy, First Capital said it maintains ASPI 2023 fair value range of 11,000-12,000 on the positivity of the potential IMF support program.

Last year the ASPI dipped by 30.5% to close at 8,489.66 points.

Cautiously bullish, First Capital recommends increasing equity exposure to 65%. In comparison mid-last year it recommended a reduction in equity exposure to 40-50% from 60%.

“With the improving economic indicators and the potential developments, Equity Market warrants a higher exposure to benefit from the potentially stronger returns towards the 2H2023,” First Capital Research said.

It said key indicators support improvement in investor confidence. Among positive factors it cited were Government retains majority securing stability: Strengthening liquidity position; Retention of Tax-Free Environment for Equity; Interest rates trend downwards and potential IMF Board-Level Agreement.

It recalled that with the uncertain environment on all three fronts, Political, Economic and External factors, adopted a stance to be watchful in the market with only about 40%-50% equity exposure.

In line with the expectations, the significant volatility in the market was clearly visible.

“However, more recently we are starting to witness a much clearer policy direction together with tough unpopular reform measures being implemented which is likely to bring in long term positivity. Moreover, with the reforms, Sri Lanka has started to move closer towards Board approval of the IMF program,” First Capital said.

It also noted that high dividend yields offer extra boost to gains whilst interest rates are tipped to head downwards.

Among sectors and stocks it recommends include:

• Energy and related companies: Energy and Energy related companies have been largely benefiting on the back of Government’s instability to fulfil the local demand amidst the shortage of forex. As a result, LIOC and LLUB reported a substantial growth in earnings and volume
• Hotel companies: Tourism sector started to recover from the economic crisis and pandemic, amidst the holiday season where several countries have lifted travel restrictions and resumed operations of multiple airlines to SL. Favoured stocks being Aitken Spence Hotel, John Keells Hotels and Hayleys Leisure
• Life Insurance companies: Life insurance companies are expected to benefit through the inflated interest rates due to the lower liability valuations and thereby reduce the charge over change in insurance contract liabilities. Moreover, increased investment income is also expected to enhance the earnings. Favoured stocks being HNB Assurance and Softlogic Life Insurance
• Food, Beverage and Tobacco companies: Food Beverage & Tobacco Counters are expected to benefit through the price adjustments. Meanwhile, as the inflation started to ease off, we expect volumes to gradually pick up. Meanwhile, NEST and CTC are among the high dividend yield counters. The other company is Ceylon Cold Stores
• Dollar earning companies: Dollar earning entities recorded a huge spike in results YoY amidst the steep depreciation on rupee against the greenback as a result of the free float of exchange rate. Accordingly, the rupee depreciated by c. 81% YTD. Favoured companies are Teejay Lanka, Hayleys Fabric and Hayleys
• Diversified Companies: HHL and JKH are the leading defensive counters which reported stable returns despite the economic crisis.