Bulls back at Bourse?

The Colombo Bourse on Friday shot up by over 100 points before losing some momentum, with the earlier development being linked by some analysts to positive macro news and a rumoured overhauling of the Securities and Exchange Commission (SEC), but others simply pinned it to investors seeing attractive value.

If rumours are discounted, then the latter reason has been the case for several weeks, though investors have maintained a ‘wait-and-see’ attitude, with liquidity being a lingering issue as well.

The 100 points rise by mid-day on Friday with the All Share Index surpassing the 5,000-point level lifted weary hearts of investors and brokers and a degree of profit taking set in, which saw the ASI close slightly below the psychological level. Yet market's value rose by Rs. 26 billion on Friday.

There has been consensus that the market lacks confidence, whilst the SEC itself has emphasised that the market must earn investor confidence by itself. The blame game continues with equal propensity and valid arguments from both sides.

Year-to-date the Bourse has dipped by 18%, lower in comparison to over 20% a few weeks ago and some investors and brokers pin it to overregulation. The SEC however is insistent regulation is key. The rumoured overhauling of SEC nevertheless comes amidst looming changes in the overall public sector.

From a macro perspective, analysts said there appears some light at the end of the tunnel. They point to the IMF’s medium term optimism as well as the likelihood of the release of the final tranche of over $ 400 million. Another is monetary and fiscal measures showing signs of delivering desired results with imports declining though the exports dip remains an overhang.

The announcement of BOI signing its biggest FDI deal worth $ 4 billion was another boost which investors got on Friday, along with Sri Lanka winning the bid to host the third Asian Youth Games, though the latter drew criticism from some saying it would have serious repercussions irrespective of the fact that the country’s economy may be stronger come 2017.

Fundamentally, market is attractive with Price Earning Ratio (PER) now at 13 times, as against 24 times a year ago.

Friday’s rebound in the Bourse didn’t appear staged as big funds such as EPF and ETF were less active. This prompted brokers to emphasise that retail and institutional investors who boosted turnover to the recent week’s high of Rs. 758 million were back in the market.

On Friday Ceylon Guardian Investment bought 200,000 Commercial Bank shares for Rs. 20 million with seller being Swiss Lloyd Ltd. MAS Capital was on the buying side of Dialog, picking up 4.5 million shares for Rs. 27 million from a foreign fund. JB Cocoshell Ltd. collected 3.75 million Textured Jersey shares for Rs. 31 million with the seller being People’s Bank.

On the foreign side, a foreign fund picked up 940,994 Commercial Bank Non Voting shares for Rs. 69.6 million from Sohli Captain. EPF was active on Bukit and Carson with Thurston Investment on the selling side of the latter. ETF picked up some quantities of Aitken Spence.

Acuity Stockbrokers said positive sentiment appeared to return to markets with both indices moving up to end the week in the green. The ASPI gained 4.01% (192.51 points) to close at 4991.21 points while the MPI closed at 4449.98 points, up 4.79% (203.22 points).

It noted that on Friday the market edged up towards the key 5,000 level as selected buying in fundamental counters early in the week encouraged retailers into speculative shares. Volumes, though thin, increased over the week, with Friday’s volumes hitting a two-week high. “Markets are likely to retain this positive momentum in the week ahead,” it added.

Arrenga Capital (now Softlogic Stockbrokers) said the Bourse witnessed strong buying interest returning to the market after a long lapse as the indices rocketed to gain over 100 points by mid-day, surpassing the all-important 5,000 mark. However, selling pressure crept in stealing almost 60% of the gains within an hour before buyers returned to the market, absorbing most of the selling pressure as the benchmark index closed marginally below 5,000.

“Turnover and activity saw a sudden recovery with the positive sentiment while being supported by four crossings, though only accounted for 19% of the total turnover,” it added.

NDB Stockbrokers said: “With improving, some retail favourite counters saw some appreciation while decent volumes were also traded in blue chips with some gains witnessed.”

Going forward DNH Financial emphasised stock selection as key. “In balancing what we consider the compelling opportunities provided by the Bourse, we see particular value in domestically-focused companies, which should experience less earnings volatility against an uncertain global backdrop,” it said.

Among domestically-oriented stocks, DNH said focus must be counters in the consumer, industrial, diversified, banking and hotel sectors, which it believes are likely to attract investors who will appreciate their potential upside.

“We believe that the Bourse at current levels is reasonably valued (and undervalued in the case of selected stocks), especially considering its expected earnings growth which we estimate to be superior to both developed and most emerging markets. We further believe that bottom-up equity selection within the current macroeconomic backdrop will generate a winning strategy for medium to longer investors,” DNH said.

Its key market takeaways are:

 • Solid macro-economic backdrop (notwithstanding the rupee depreciation which could adversely affect domestic inflation levels)

•High interest rates although supporting deposit mobilisation for banks, unlikely to shift investible funds away from domestic equities. We advise investors however to concentrate on stocks which have a relatively low gearing and are cash generative.

•Balance sheets appear generally healthy and individual company prospects should help drive returns, hence an alpha focused bottom up stock selection strategy advised

During the week turnover value too recorded a week-on-week gain with daily average turnover value increasing 11.31% to Rs. 373.37 million, relative to last week’s daily average of Rs. 335.43 million. Commercial Bank was the largest contributor to the week’s turnover value, adding Rs. 166.29 million (or 8.91% of total market turnover value) to the market.

JKH and Commercial Bank [NV] followed closely with contributions of 6.45% and 5.81%, respectively. Market capitalisation improved to Rs. 1901.22 b, compared to the previous week’s value of Rs. 1827.89 b, representing a week-on-week gain of 4.01%.

Foreign investors closed the week in a net buying position of Rs. 8.72 million, compared to last week’s net selling position of Rs. 5.62 million. Commercial Bank [NV] and Overseas Realty led foreign purchases in terms of volume, while Dialog Axiata and Malwatte Plantations led the foreign sales. In terms of value, Central Finance and Commercial Bank [NV] led foreign purchases, while Carsons Cumberbatch and JKH led foreign sales.