Monday, 9 February 2015 00:00
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Having marked the end of yet another successful year, CAL (Capital Alliance), Sri Lanka’s leading full service investment bank is preparing to further secure its position as a market leader in 2015. As CAL begins a new year, the company remains committed to meeting the diverse needs and goals of its investment clients. Purasisi Jinadasa, Chief Strategist and Head of CAL Research (CAL’s research division), shared the following insights to help investors navigate their way through a challenging investment landscape
An overview of investment prospects in 2015
Looking ahead, 2015 is likely to be a consumption-driven year and as such, investors should focus on consumption plays. Over the past two years, policy changes were enacted to cool down an overheating economy and consolidate the fiscal position (e.g. caps on lending, increases in energy tariffs, higher duties on imports etc.), which led to an overall slowdown in consumption.
In 2014, those changes were reversed to encourage consumption (lower interest rates, lower energy tariffs as coal power kicked-off etc.). Generally such changes take eight to 12 months to reflect in the overall economy and what we witnessed during 4Q2014 indicates that consumption has finally started to pick up.
Navigating the current economic climate in Sri Lanka
Due to the change in Government, we should expect a certain degree of political and economic instability. However, on the consumption front, we remain bullish as the current Government has promised further reductions in living expenses.
If we only take into account the previous Government’s downward tariff revisions on energy, an average household should be saving a minimum of Rs. 3,000 per month (CAL maintains a proprietary inflation index and our average household income is Rs. 80,000). This indirect uplift in incomes will directly translate into an increase in discretionary spending. Households will opt to consume more soft drinks or buy more beauty products and electronics, etc.
The flipside of this increase in consumption is the overall effect on the wider economy in terms of inflationary pressure, leading to higher interest rates and a fall in currency value. A lot will also depend on the mechanisms that the present Government will utilise to handle this risk.
Nevertheless, the foundation is in place to contain inflation between 5-7%, the currency should remain within a band of Rs. 131-133 to the USD by year-end and one-year treasury bills should be maintained within single digits. We expect GDP growth to be around 7% and global macro-variables (e.g. lower oil prices, search for higher yield and lower risk) to support Sri Lanka’s economy.
However, transparency and quick dissemination of new Government policies will prevent shocks and unnecessary volatility. This Government is also known for its pro-business views and divergence from this path may also bring greater volatility.
Potential industries that are thriving
Given the uptick in consumption as explained earlier, keep an eye out for consumption-related stocks, where discretionary spending plays an important role.
CAL’s top tips for evaluating a potential investment
The first rule is to never go by sentiment or what somebody else tells you. Investors who do this risk “getting burnt” and are equating investing in equities to a form of gambling. There are a variety of measures you can take to reduce your risks and ensure that you’re making the right investment decisions:
1. Learn about the market: Sri Lanka is a frontier market. The stock exchange is nascent and the investment vehicles and mechanisms available are very limited. As such, investors should expect to find a large number of stocks that are also ‘young’ and not investible. As a result, if investors go by what others say, they are bound to lose money. Anybody serious about investing should expect to invest for the long-run as opposed to engage in day trading. The stock market is actually a very attractive proposition for serious investors looking to make money, but investments have to be made in an educated manner.
2.Learn about the stock: Once you know your market, you have to educate yourself about the stocks in which you intend to invest. Learn about the company you are planning to invest in, study how it makes money, understand what the competition is doing and develop a sense of where the company is headed. Once you have done this, read research reports done by independent research departments and question them on their assumptions. Like everything else in life, investors will do well if they put in the effort to learn. The returns can be very attractive over a period of time.
3. Allocate money regularly: Once you have chosen three to five companies, allocate a monthly budget and buy the stocks. Diligence and consistence is very important. Further, don’t get side-tracked by short to medium-term price movements. It can be a dangerous distraction for an investor looking to build wealth. If there is a price fall, reassess your assumptions and reach out to your research provider and assess whether there has been a fundamental change in the company’s operations. If there hasn’t, it might be a good opportunity to buy more at lower prices. If core operations have fundamentally changed for the worse with no timeline for improvement, cut your losses immediately.
4. Know when to exit: Once the stocks in which you have invested reach your return requirement, exit. Don’t fall prey to greed. Similarly know when to cut your losses.
An overview of CAL’s solutions for HNW clients and SMEs who want to make investments this year
CAL has a very robust gamut of investment solutions, ranging from equities to fixed income. In equities, CAL Research provides fundamentally-driven stock ideas supplemented with comprehensive research. This is further complemented with an opportunity for clients to sit with our research department and learn how to invest and understand economic and specific company outlooks. We encourage clients to exchange ideas in order to strengthen understanding and expel the fear of investing in equities.
For those who may not have the time to invest on their own, CAL’s wealth management division can help you structure and choose from investment choices in an environment of complete discretion. With a dedicated relationship manager and support team, we develop a thorough understanding of your financial position and develop strategies to enhance your assets. Our depth of knowledge, skills and experience ensures that client affairs are handled smoothly, discreetly and effectively.
General advice for investors in 2015
Always strive to become an educated investor. Individuals can no longer rely on savings and fixed deposits to maintain an adequate lifestyle post-retirement. It’s in the investor’s benefit to explore alternative investment vehicles and better map out their life in order to ensure the ability to meet expected expenses. There are great opportunities in the stock market to help meet this need, which may become harder to come by in the near future.
In equities, CAL Research’s stock picks have provided our clients with a 3-year annualised return of 25% vs. the ASPI’s 6.5% (2012-2014). Potential clients are encouraged to engage with CAL and work together to meet their aspirations.
Capital Alliance (CAL) is continuously striving to become the preferred partner in financial markets. Having commenced operations in October 2000, CAL has established itself as a leading player in the financial markets of Sri Lanka. The company specialises in the origination, trading and investment of debt and equity securities and this mix of expertise and services allows CAL to offer integrated and customised solutions to its customers across the entire financial spectrum.
The company strives to build lasting relationships with all of its clients, in order to acquire an in-depth understanding of their needs and goals.
In a short period of time, CAL has built a reputation for itself as a market leader, by consistently delivering excellence in execution, world-class research and product innovation.
