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By Charumini de Silva
Despite the economic and political turmoil, capital market research experts expressed confidence that it still has an opportunity to bounce back — if investors make informed decisions avoiding herd mentality, in a disciplined approach to pick on defensive counters which can outperform in crises.
Amidst blood baths and adjustments expected in the next few days, they shared a ray of hope with undervalued stocks for accumulation, whilst sharing valuable insights and recommendations for the mature, retailers and juveniles that are yet to make an entry to the market at the joint initiative of the Daily FT-SC Securities Ltd., co-branded ‘Market Pulse’ held on Monday.
The discussion titled ‘Buy, Hold, Sell’ featured Acuity Stockbrokers Director and Head of Research Shehan Cooray, Asia Securities Senior Vice President Research Naveed Majeed, Bartleet Religate Securities Manager Research Nusrath Mohideen, Capital Trust Securities Head of Research Hasitha Leanage, First Capital Head of Research Dimantha Mathew, SC Securities Head of Research Charitha Gunasekere, SC Securities Manager – Sales Saliya Gamagedara and Softlogic Stockbrokers Head of Research Mahesh Udugampala. They shared their expert insights on overall market movements in going forward at the live telecast aired via FT TV with Daily FT CEO and Founding Editor Nisthar Cassim and SC Securities Assistant Manager Investment Banking and Marketing Dilusha Gamage as moderators.
Their prediction was coming days and weeks will be tumultuous for listed equities as the market and investors adjust their sentiments to tightest ever monetary policy earlier this month which resulted in a 7% hike in policy rates followed by declaration of temporary pre-emptive default of repayment of all external debt as of 12 April, effects of sudden free float of the currency, social unrest and political instability. Year to date the stock market is down by 40% with Rs. 2.5 trillion in value wiped out. However yesterday the market saw a welcome gain, first since 5 April.
Pointing out that the current economic volatility is nothing new, Heads of Research of broking firms opined that Sri Lanka went through similar situations in 2001 and 2008 in which it emerged stronger, whilst outlining on prospects and challenges that are natural under current circumstances.
Time for market adjustments
Leanage was of the view that the market needs to digest on the high interest and inflation rates going forward.
“The Central Bank has taken a view that it will maintain near zero real interest in going forward. In that backdrop, from an investor perspective the market would require asset classes which provide over 0% real returns. Investors need to look at growth counters that have protection against high inflation, depreciation and taxes going forward,” he added.
Although the market has come down by 40% from its peak in January, he said there are still counters where PEs range from three to five in terms of forward earnings, which will give the necessary protection to investors.
With the International Monetary Fund (IMF) program coming into place from the second half of the year, he said implementation of tax and policy reforms will have knock-on effects on cost of production, where investors need to look at equities that will provide protection against these factors.
“Even though there will be some volatility in the short term, there will be a move from fixed income to equities in the medium term,” Leanage predicted.
Investors should look at defensive counters
Udugampala said investors’ strategy should be to look into sectors that can do well in a crisis situation.
Exports, real estate, tourism and commodities were counters he listed out where investors could hedge on compared to other sectors.
“Even if there are fixed incomes, opportunities are still available for equity investors. There will be some volatility in the short term. Investors must look at the opportunities case-by-case and not by herd instinct. Look at the future earning value, potential and then make investment calls,” he added.
The Central Bank’s stance to hike policy rate by 7%, reforms taking shape along with IMF facility, he said it will boost the confidence of the market and give impetus to the investors as well.
“I think it is time to collect fundamentally strong shares. Export oriented shares which are insulated with 90% of their revenue are generated in dollars. These are the companies investors should eye on, which have also come down in value at present. The investors must continuously study portfolios and shortlist those that can outperform under current economic circumstances,” Udugampala outlined.
Beyond June market to see activities
Mathew said the current economic situation was expected and they had been quite conservative in their recommendations since the market started on a deteriorating path in 2018.
Although they had been warning investors to preserve the capital, whilst getting them prepared for an economic shock and uptrending interest rate, he noted that the change of the Central Bank’s aggressive path of monetary policy and public unrest came by surprise.
“Given the current market status, we recommend investors to add shares back into portfolios, but not in a hasty manner because the interest rates are high. We anticipate a negative GDP for 2022, whilst expecting the inflation to worsen around 26-29% by June and July which will further deteriorate the situation before it gets better. However, we believe investors should take advantage of the current situation and buy into the market, especially risk avert assets — dollar income companies, depressed assets like banking and insurance counters,” he explained.
Noting that such economic turmoils are not new to Sri Lanka, he said there will be a boom beyond June with the IMF program coming into play. “Gradually accumulate stock in the next three to four years. Although there will be an uptick in the market, it is obviously not going to be an overall increase. It will rather be specific shares, like in 2011/12 where we saw high dividend yield counters. Now, that is something we can expect in the overall market,” Mathew added.
Make informed decisions
Mohideen said with much happening on political, economic and social arenas, there is no guaranteed path the market will go, but will solely depend on how investors will look at it going forward.
“We cannot downplay the political instability as it will play a greater role in investor behaviour being more panicked before it gets any better. But after a while — I think there is a lot of opportunity. Last year the market gave a 74% return. Even during turbulent times like in the COVID pandemic, companies have come out strongly. They have managed to operate differently and I don’t see the current situation any different,” she added.
Pointing out that the first two quarters of the year is going to be very challenging for all companies given the high inflation and interest rates coupled with the external challenges, she also agreed that there could be gains for investors in fundamentally strong export counters which are naturally hedged.
Despite the appetite for such risk averting, dollar earning counters going forward, she cautioned investors on impacts of operational difficulties, which will come into effect in the next two quarters.
She also called on all broking firms to educate the retail investors who often get their fingers burnt in situations at present, citing that institutional and high networth investors are more informed.
“Retail investors must speak to brokers and research units. Look for sectors that can be benefitted. Take informed decisions before moving into the market. Always look at a medium to long-term view rather than a short-term perspective,” Mohideen stressed.
Diversify portfolios
Majeed said realistically they could expect there to be some amount of weight on portfolios being put towards fixed incomes as it is the more attractive asset class which has also been the case over the past two years.
“Investors should expect this adjustment in the market to come about. They should diversify portfolios as ‘smart investors’, which gives a very good opportunity to bottom pick,” he added.
He also endorsed the fact that foreign income earning stocks are the counters to go for which will improve on the effects of forex growth.
“Approach investors can take is by stock picking resilient firms, via balance sheet strengths and their capabilities of weathering storms even during economic turmoil. Investors can also stress-test some of their absolute bottom fundamental values to see if it is a no-brainer when it comes to picking a stock like that,” he explained.
However, he said how the level of economic uncertainty going to feed into the equities and company performances are going to be challenging in going forward.
“There is going to be an impact on the demand side of the firms via depreciation in real purchasing power, whilst on the supply side also there will be an impact on dollar shortage and energy interruptions. But the impact is really too early to be judged,” he said.
Focus on fundamentally strong stocks
Cooray said in a volatile economic condition investors should explore fundamentally sound stocks which are at compelling evaluations with a dollar exposure which can be hedged against inflation and interest rates.
“Investors must double down on the fundamentally strong stocks. In case, there are no additional funds to put into the market, rotate them around the most speculative and high valued stocks,” he added.
Outlining that not all stocks will provide a hedge against inflation and interest rates, he suggested taking chips off the table and taking part in short term fixed income.
“With new reforms being laid down in the right economic directions, there is room for fiscal and monetary slippage going forward in the next three to four years,” Cooray added.
Technical analysis: Stick to the basics
Gamagedara said nothing is going to be difficult in going forward if the investors and traders stick to the basics.
Claiming that investors and traders could not stick to the basics from November last year, he suggested the present scenario is an ideal opportunity to seize it by understanding the overbought, oversold and psychology behind three factors.
“What we need to understand is risk to reward from a traders and investors perspective. In this situation, investors have the launching pad and traders who stick to their strategies can also make use of it. You need to understand the difference between sentiment investors and market divergence. This is why technical analysis is critical,” he stressed.
It was pointed out that the investors and traders were highly glued to short term returns conveniently from December 2021 to January, unfortunately forgetting the risk factor attached to it. Given the current circumstances he recommended it is important to understand how bullish divergence is going to take place.
“There are so many counters where bullish divergence has happened. But when the sentiments are bearish capture the bullish divergence opportunities and follow accumulation strategies. This will make rewards higher than the risks,” Gamadedara said.
Impact of high interest and inflation rates on firms
With interest rates shooting up Gunasekere said financial costs of such companies will also soar drastically. Thus, calling on investors to look at company balance sheets for their assets and liabilities.
He cautioned that firms which are exposed to local and foreign borrowing are more vulnerable going forward, whilst their incomes will also be impacted adversely. However, he said the impact will differ from sectors they are into as those with large cash reserves will not be impacted severely such as insurance firms.
In terms of corporate taxes, he said certain sectors were given concessionary rates which they will have to bear, whilst some can pass that additional costs to consumers — especially via products which are high in demand.
Mathew said the market is anticipating the market to get worse before it gets any better.
“As investors, an accumulation strategy is the way forward given the current economic conditions. Now is the time to reinvest those cash looking at stocks for the next three to four years. At the moment, investors will not be able to find the bottom of the market and even if you find the bottom; you’ll still not find quantities to buy,” he said.
He urged investors to look at equities that are mostly in defensive counters, dollar earnings, dividend yields such as life insurance stocks over the next six to eight months, underlining that such measures are likely to bring above average returns to long terms and beyond inflation.
Mathew was of the view that the market will see positive activities beyond June.
Market reaction to unprecedented 7% policy rates hike
Majeed said the tightest ever monetary policy earlier this month which resulted in a 7% hike in policy rates was unprecedented. He hoped the market will see more adjustments during this week and maybe next week too.
Cooray said the impact of policy rates were only felt by the shorter bonds and not in longer term ones.
Final remarks
Leanage predicted the market to be negative in the next couple of days as a result of investor sentiments. However, he called on investors to seek fundamentally strong and valuable counters.
Udugampala said the market could expect volatility in the near future, whilst cautioning new entrants to look at long term, rather than index picking. He called on investors to explore sectors that can outperform even under economic turbulence.
Gunasekere insisted on making informed decisions without being misled by herd instincts.
Mathew called on investors to be bargain hunters collecting in the blood bath. “Be a prudent investor and avoid deprived situations of panic selling shares. Restructure portfolios to be more defensive counters,” he added.
Mohideen asserted to watch the market closely for bargain opportunities, whilst also focusing on homework of the individual companies and sectors.
Majeed said market volatility is likely to get heightened, whilst calling on investors who have fundamentally strong counters to hold on to them and pointed out it is a good time for freshers to enter.
Cooray opined market is likely to see a lot of selling pressure from those who are on margin, though it is a good opportunity for long term investors with bargaining powers to pick up stock at cheaper valuations.
Gamagedara said blood is on the streets, seize it before it dries.
Pix by Lasantha Kumara
