Foreign confidence in economy appears to be improving: First Capital Equities

Monday, 16 September 2013 00:24 -     - {{hitsCtrl.values.hits}}

With year-to-date net foreign inflow topping the Rs. 19 billion mark last week with a fresh dose of Rs. 875 million, external confidence in the economy appears to be improving, according to First Capital Equities. JKH saw net buying of Rs. 617 million whilst Sampath Bank enjoyed Rs. 192 million worth of net buying. Commercial Bank (Rs. 41 million) and Lion Brewery (Rs. 30 million) were other attractions for foreign investors. First Capital said the Bourse regained and closed with positive returns for the first time in the month of September along with the renewed investor confidence about the economic growth, and the probable positive response from foreign investors who participated at the investor forum held in Hong Kong in the beginning of this week. “Reaffirming the global confidence in the domestic economy, Sri Lanka’s State-run National Savings Bank has raised US$ 750 m at 8.875% through a five-year US$ 500 m bond. Although the bank initially planned to raise US$ 500 m, the deal attracted orders worth US$ 2.35 b amid jittery international bond markets,” First Capital said. “Even though there appears to be an apparent disconnection between the global confidence in Sri Lanka and performance of the Bourse, we believe that this gap should narrow once domestic investors realise that the increased oversubscription in Sri Lanka’s bond issues is indicative of the strong foreign confidence in the Sri Lankan economy. Furthermore, it is important to realise that the oversubscription in the country’s bond scripts come at time of heightened global risk and significant liquidity constraints for foreign sovereigns and corporate,” the broking firm added. Notwithstanding the Bourse’s mild sell off that may have dampened retail sentiment temporarily, First Capital Equities believes that the market now offers a significant investment opportunity and attractive value for those who are willing to look beyond the very short term provided that the right investment strategy is employed over a reasonable investment horizon. “For those investors who prefer long-term sustainable returns, a bottom-up stock selection approach is advised in order to build a quality portfolio which will generate double digit returns. In order to benefit fully from a flight to quality strategy however, investors may need to be patient, maintain a healthy investment horizon and provide sufficient time for their investments to generate alpha,” it added. To decide on quality portfolio, although First Capital Equities does not rule out the importance of earnings as a strong indicator of growth, it is highly important to determine the source of profits, whether a result of top line growth or an increase in other income or dramatic cut in costs that could have a negative impact on productivity. Of perhaps even more significance is the sustainability of earnings. “We advise investors to seek quality, both in terms of the top line and the bottom line, and accentuate the need to select stocks that may not only pass the quality test in terms of fundamentals, but are also sufficiently liquid with healthy bid/offer spreads,” it said. Softlogic Stockbrokers said the benchmark index last week saw some gains except on Monday leading to 77 point increase on a WoW basis. “We believe the market at this point is likely to consolidate before any run in either direction. We expect buying interest to enter the market at the current level with economy expected to be on a slow, but recovery path,” it said. “However, though interest rates are unlikely to decline in the short term, the rates have kept steady during the last two months, which is a good sign. With interest rates at current levels we expect there is likely to be higher demand for high dividend yielding counters which may result in a possible capital appreciation as well,” Softlogic Stockbrokers added. Asia Wealth Management said 2QCY2013 earnings were on a mixed note as the headwind posed by the macro environment including relatively high interest rates, volatility in LKR, inflationary pressure that slowed down consumer demand and sharp increase in energy cost curbed the earnings growth. Nevertheless, OECD indicated on Monday that the growth in major developed countries is gathering momentum. This is an encouraging factor in terms of Sri Lanka’s economic context where country’s major export receipts are dominated by US and the Euro Zone. “Therefore, companies who have large exposure to export earnings are likely to benefit in the future, whilst fairly stable LKR movement is also likely to support the corporate earnings. Further, expected downward trend in market interest rates subsequent to the expansionary monetary policies adopted by CBSL is likely to ease companies’ financial burden across the sectors, and is also likely to improve the demand for credit by the private sector and in turn support the overall economic growth,” Asia Wealth said. “However, we expect the monetary authorities to hold the monetary policy rates at the prevailing rates in September considering the improvement in external trade in July under the current policy rate framework and due to the local currency facing some downward pressure in the face of weakening currencies of the peer economies and foreign out flow from Sri Lankan government securities. On the back of these developments, we advise investors to take position in counters that are trading at attractive multiples and are likely to outperform the peers,” Asia Wealth added.