‘Other’ investors turn bullish

Contrary to exaggerated claims the EPF investments in to the stock market last week had amounted to only less than 10% of market activity and unlike some past contentious buys, this time around it had focused on blue chips.

The total turnover of the Colombo bourse last week was Rs. 8.6 billion and local purchases were Rs. 5.8 billion, whilst EPF buying was around Rs. 550 million as per Daily FT estimates, accounting for 6% and 9% respectively of the totals.

Bulk (slightly over 80%) of EPF buying were on Monday and Tuesday when the market literally crashed losing Rs. 112 billion in value. It had been relatively inactive in the last three days of the market.

Analysts said that the turnaround in the Colombo Bourse late last week was powered by other investors including a host of institutional investors and retailers whilst foreigners remained bullish too being net buyers.

A welcome feature of EPF buying was its exclusive focus on blue chips and fundamentally sound second tier stocks. According to those who closely monitor the Bourse, EPF’s basket of stocks last week included JKH, Bukhit, Carson, Dialog, CT Holdings, Cargills, Commercial Bank, Asian Hotels, Keells Hotels, CIC, DIMO, Dipped Products, Haycarb, Dockyard, LOLC, Central Finance, Royal Ceramics, and Lanka Tiles.

In the past EPF’s excessive buying in to banking stocks in particular as well as some speculative counters such as Galadari had been questioned by both within and outside the market. Its stock selection last week appears to be sound perhaps after past criticism.

The Bourse’s value on Thursday shot up by whopping Rs. 96 billion in its biggest ever gain reducing the gap of the massive Rs. 112 billion lost on Monday and Tuesday on account of margin calls, negative sentiments over volatile exchange rate, rising interest rate scenario and fuel price hike impact on the economy. Given the attractive valuations of most stocks, the market saw a flood of institutional investors including corporates, unit trusts, insurance funds etc. The momentum was spiced up by a host of high net worth individuals with retailers chipping in.





Analysts said that whilst EPF buying in may have prevented a worse collapse Monday and Tuesday, it failed to push indices up hence allegation on the latter by sceptics wasn’t correct. Apart from EPF, the other state fund active in the market last week was Employees Trust Fund (ETF) which however was seen on the selling side as well booking profits or realigning its portfolio.

“What drove the indices up from mid-week was return of bargain hunters on attractive valuation,” said analysts who however admitted that presence of EPF did strengthen investor sentiments. “The rebound was largely fuelled by aggressive corporate and high net worth investor buying,” they added.

Assertion that valuations are attractive is manifested by the fact that during the past one year, CSE’s market capitalisation has dipped by over Rs. 700 million, of which around Rs. 200 billion had been in the month of February. The Price Earnings ratio is around 13 times as against 30 times in February last year.  There are several fundamentally sound stocks whose PER is at single digit levels whilst in terms of forward PER the market is attractive as well.

This view was endorsed by Asia Wealth Management in its last week report. Noting that “time is ripe for large investors,” Asia said the Colombo bourse concluded an astounding week with high activity levels and influential legislative changes together with the reactivation of both local and foreign investors. Attending to number of months prior to this week, turnover levels were barely above LKR1 billion levels whilst at the same time stocks with less attractive valuations were dominating investor preferences. However this trend has now reverted with investors accumulating fundamental stocks with attractive valuations. Commercial Bank of Ceylon was one such counter which attracted heavy investor concern.

“The current exchange rate is very much attractive to potential foreign investors to enter the market and we observed foreigners being positively responding to this stimulus, and a continuation of this would lead fresh capital flowing to the market. But we strongly believe that stability in the economic policies is vital to retain investor’s confidence,” Asia added.

“Recent changes in selected macroeconomic fundamentals would impact the overall market with varying degrees yet the outlook is positive in fundamentally established stocks. On a separate note, we believe that amount of funds getting attracted to the market via retail investors would curtail to a certain extent as a matter of increased cost of living. So we strongly believe that the time is ripe for large investors to enter the market at the prevailing attractive valuations. Where, the Sri Lankan stocks currently trading on a 12.6 times trailing PER,” Asia Wealth said.

Acuity Stockbrokers said “with corporate earnings thus far being robust (approximately 50% of the corporates reporting earnings recorded Y-o-Y growth) we expect retail sentiment too to be positive in the week ahead.”