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Thursday Dec 12, 2024
Monday, 13 February 2017 01:10 - - {{hitsCtrl.values.hits}}
Stock broking firm Enterprise Ceylon Capital (ECC) is stressing it is time to invest in equities with opportunities for long-term value.
Releasing its Sri Lank Equity Strategy titled ‘Time to invest’, ECC forecasts GDP growth to rebound to 6-7% beyond 2017.
“Tightening of both monetary and fiscal policies could slow down economic activities in 4Q2016E and 1H2017E leading to a moderate growth in GDP of 5% in 2017,” it said, but added: “The economy is projected to grow 6-7% underpinned to the macroeconomic stability- and infrastructure-led development in the medium term beyond 2018.”
ECC also said market valuations were at a discount to regional peers.
It linked the 10% drop in ASPI in 2016 to fiscal tightening, monetary tightening and teething issues in the coalition Government. However, the dip in 2016 has only improved the attractiveness of the Colombo Stock Exchange, with the current P/E of 11.8x being well below the long-term median P/E of 14.2x.
“With regional peer valuations ranging from 13x-20x, CSE is at a discount to its regional counterparts and thus has more potential to draw foreign investors. We expect the market to move upwards in line with the expected earnings (growth of 12%YoY on average) during the course of the year,” ECC said. It estimates the ASPI to grow 17.8% CAGR over next three years backed by macroeconomic stability and strong economic growth which will attract investors.
The broking firm also said medium- to long-term growth prospects remain promising subsequent to the stabilisation of the economy. “We expect corporate net earnings beyond 2018 to deliver an average growth of 15%YoY,” it added.
Good politics have also strengthened ECC’s optimism. It said that the good governance measures undertaken by the Government jointly with strengthened international relations has resulted in lifting of the fishing ban by the EU, progress made in restoration of the GSP Plus concession from the EU, leniency towards Sri Lanka at the United Nations Human Rights Council, attracting large-scale FDIs to Hambantota ($ 1.0 billion in 2017E) and Colombo Financial City ($ 1.4 billion over three years) and the progress made in signing the Economic and Technology Cooperation Agreement with India.
The broking firm noted that the Government had also demonstrated a commitment to improve the fiscal position.
The Government said it intended to keep the rising state expenditure at bay and, jointly with incremental revenue generated from upward revision in taxes, to post a lower budget deficit in 2017 at 4.6% of GDP (deficit was curtailed to 5.4% of GDP in 2016 from 7.4% in 2015).
“We believe that through fiscal consolidation a reduction in Government borrowing would result in stabilising inflation, interest rates and exchange rates in due course,” ECC said.
According to ECC, with local council elections due, the key risk for 2017 could be an element of political uncertainty. A delay in the expected FDIs to Hambantota and Colombo Financial City could strain the foreign reserves and exchange rate, it added.
