Monday, 7 October 2013 00:00
With a year-to-date gain of 3% in dollar terms and a Price Earnings Ratio of 12 times, the valuation of Sri Lanka’s stock market remains attractive in comparison to its peers, according to an analysis by a broking firm.
“On a valuation basis, while the Sri Lankan Bourse is certainly not the cheapest, when juxtaposed against global peers, it is now one of the most attractive at a PE of 11.8X (dollarized) and at a 30-40% discount to the EM world, leaving considerable room for upside,” First Capital Equities said.
It said the divergence between global equity markets and Sri Lanka’s Bourse during the month has been stark, with both developed and emerging markets rising significantly while the Sri Lankan Bourse experienced only mediocre growth.
“Notwithstanding the economic woes in the Eurozone, the eurostoxx 50 rose by 8.6% during the month while the S&P 500 gained 1.6%. Most Asian markets jumped on to the bandwagon as well, with the Sensex up 17.8%, Hang Seng up 3.4% and the Kospi rising by 5.7%. The sharp run up during the month resulted in valuation multiples for most global markets rising to relative highs,” it added.
According to First Capital Equities, the key takeaways of CSE include:
Bourse is up 3.0% YTD (dollarised) and trading at a PE of 11.8X, still low compared to traditional EMs and leaving considerable scope for upside.
Foreigners continued their buying spree with net inflows of Rs. 18.96 billion (US$ 142 m) recorded in 2013 YTD while having reported Rs. 39 billion (US$ 303 m) in 2012. First Capital Equities expects foreign buying to accelerate going forward but limited to bluechip counters, particularly high growth stocks in the diversified, banking, food and beverage and hotel sectors.
“Despite our optimism regarding the Bourse, not all stocks however will perform. Current market conditions present an opportunity for investors not following the herd to invest in a basket of stocks that will outperform over a complete market cycle,” First Capital Equities stated.
Commenting on the market’s trajectory, while the general lull in the Sri Lanka Bourse is certainly uninspiring, First Capital Equities believes that this is a temporary dislocation and for international fund managers squaring off their books in other emerging markets, Sri Lanka offers alpha.
Meanwhile for domestic investors, with the likelihood of a further softening of interest rates, the Bourse offers firm value in high growth companies. “Consequently, we advise investors to refrain from assuming any speculative positions but concentrate on a stock picking strategy to identify companies with a largely domestic focus in order to ‘beat’ the market and generate above market returns,” the broking firm said.
“We reiterate the need for investors to take a directional call, make an informed investment decision, build a robust portfolio and maintain a strict investment discipline over a reasonable investment horizon in order to benefit fully from the market’s break to the upside that we believe will occur sooner than later,” First Capital Equities added.