Sri Lanka’s growth world’s fourth best!

• DNH Financial showcases impressive GDP data to make a credible case to consider stock market as an attractive medium to long term investment option

The high 8.4% economic growth enjoyed by Sri Lanka in the third quarter is considered the fourth best in the world according to an analysis by stock broking firm DNH Financial.

It said that Sri Lanka judging by impressive third quarter GDP data has bucked the downward trend in the global economy. As per its analysis Sri Lanka is only lagging behind the world economic powerhouse China whilst Sri Lanka has also remained consistent as against other emerging economies  in the top four rank.

DNH Financial said the 8.4% third quarter growth (compared to 8.2% in second quarter and 7.9% in 1Q 2011) is likely to enable the country to comfortably achieve its full year growth target of 8.0%.

“Growth, although broad based will continue to be driven by the industrial and construction sectors. We view this performance as highly encouraging and indicative of Sri Lanka’s resilience and strength in an environment of globally heightened risk,” DNH said.

“We believe that a solid fundamental base is developing for a prolonged rise in the market with Sri Lanka now growing amongst the fastest in the world,” it added.

DNH also showcased the impressive GDP data to make a credible business case for investors who mysteriously remain shy of the stock market.

Emphasising that bourse’s performance will be underpinned by strong macro-economics, DNH said: “In our opinion, we see no credible reason for medium to longer term investors to shy away from the domestic bourse given the prospect of strong upside potential in 2012 underpinned by solid macro-economic and corporate EPS growth.”

“However, for those seeking speculative gains, the bourse is clearly likely to disappoint as the opportunity to realise short term gains is likely to prove more and more difficult,” DNH said.

It opined that investment into equities appears to have been generally feared due to global headwinds, liquidity constraints of brokers and the lack of short term opportunities. The majority of investors appear to be waiting for either a short term rally to participate in or a strong correction before entering the market.

“With the domestic macro-economic backdrop looking increasingly strong, we believe that it is not ‘if’ but ‘when’ a market re-rating would eventuate and we believe that it is likely to be sooner than later. While we do admit that the bourse has certainly taken its time to absorb the positive developments in the economy, we believe however that heading into the year end, the market is likely to positively surprise once investors realise that the performance of the bourse is backed by solid fundamentals both on the macro-economic and corporate front. Consequently, we advise investors to carefully stock-pick and re-enter on price weakness,” DNH said.

On a sector basis, the broking firm believes that conventionally defensive sectors such as Telecoms may experience a slowdown in top line growth exacerbated by downward pressure on margins due to intense price competition.

“Conversely, we believe that several of the traditionally more cyclical sectors such as Manufacturing, Construction and Tourism could generate highly attractive defensive attributes, such as strong volume growth, pricing power which should beef up margins while generating sustained cash flow notwithstanding a rise in interest rates and potentially higher gearing levels for select companies,” it added.

In terms of market positioning for the New Year, DNH is advising investors to carefully assess the quality of their existing portfolios and restructure and rebalance their books where necessary in order to take advantage of the market’s secular growth prospects in 2012.

For foreign investors, with emerging markets favourites China and India both experiencing a slowdown in growth, DNH is recommending an entry into the Sri Lanka bourse at current levels as it now completes its consolidation process and enters a period of secular growth.

“We advise investors to align the strong fundamentals to the relevant sectors, sub-sectors and stocks in the bourse that will benefit fully from the macro-economic upswing over the next few years,” DNH said.