Buy stocks, not the market, says DNH Financial

Looking back at 2012, it is encouraging to note that several blue-chip stocks in our investment universe have reported significant double digit gains during the year despite the bourse declining by 7.1%. The outperformance is commendable given the fact the domestic market sentiment remained largely subdued during the year although foreign net buying increased to record levels.

The strongest gains were reported in the Food and Beverages, Banking and Finance and Diversified sectors on the back of robust domestic consumption and we expect this trend to continue in 2013. Despite the likelihood of continued high interest rates (notwithstanding the current downward pressure on rates), we expect the bourse to gather momentum during the year.

However, we advise investors to adopt a stock picking strategy focusing on blue-chip, liquid counters that will benefit from the current strong domestic consumption cycle and avoid a herd mentality approach.

Market trajectory

While we do contend that the Sri Lanka bourse has not delivered on an YTD basis in 2012, (declining by 7.1% during the year) due to a multitude of factors, we view the market’s consolidation as a strong opportunity to accumulate quality liquid stocks that will outperform in 2013.

While domestic consumption has remained strong (despite the prevalence of high interest rates), we expect this to have a strong positive impact on selected companies in sectors such as F&B, Tourism, Diversified, Banking and Construction. Consequently, we advise investors to pro-actively seek counters in the aforementioned sectors that are likely to record healthy and sustainable top line growth, firm margins, are cash generative and sufficiently liquid; attributes which we believe will lead to above average gains and outperformance.

While domestic interest rates may decline, albeit moderately in 2013, we still expect rates to remain high on average and thus advise against selecting stocks that are highly leveraged. We re-iterate the need for investors to take a directional call, make an informed investment decision, build a robust portfolio and maintain a strict investment discipline in order to benefit fully from the Bourse in 2013.