Economic Review 2013 and 2014 outlook

Monday, 20 January 2014 00:01 -     - {{hitsCtrl.values.hits}}

The year 2013 commenced with the GDP growth target of 7.5% following the tight year of 2012 which recorded an economic growth of 6.4%, the lowest level in four years, backed by tighter monetary conditions. International Monetary Fund (IMF) also viewed the Sri Lanka economy with a target growth level of 6.25% for 2013 which is below to the CBSL’s forecast. Encouraging signs from monetary front towards the year end Further, the country’s headline inflation was also seen in the upper extreme of the single digit level of 9.2% in December 2012 while worsening further into 9.8% in January 2013. Despite the relatively high inflation level prevailed, monetary authorities were executing plans to relax the stringent monetary policies in order to fuel the growth numbers for 2013. Therefore, the CBSL slashed the policy interest rates by 25bp in December 2012 with the view of giving fresh hopes for the economy for 2013 followed by two rounds of benchmark interest rates cuts throughout the year to record the CBSL’s policy rate as 8.50% as at end of the year. Further, Statutory Reserve Ratio (SRR) was also adjusted downward by considerable 200bp (2%) to reach at 6%, the 10 year lowest level while allowing to enhance the bank’s lending capacity. However, the relaxed policies were unable to reap benefits over the 1H2013 mainly due to the tumbled private sector credit growth over the first nine months, owing to the increased domestic borrowings from the government to bridge the fiscal deficit while keeping market interest at its relatively high level despite relaxed monetary tools. Relatively high inflation of 9.8%, recorded in January mainly due to the bad weather conditions and crop damages causing supply disruptions witnessed a gradual fall towards the end of the year reaching its 21 months low level of 4.3%, driven through the low level of food price volatility due to the improved supply owning to the favourable weather conditions. Improved Performances from major state enterprises On the other hand, Ceylon Electricity Board (CEB) raised the electricity tariff during 1H2013 causing a negative impact primarily on the energy driven manufacturing entities as well as the overall cost factors of the economy. These factors has caused negatively on the corporate earnings sentiment during 1H2013 , recording tumbled revenue numbers coupled with squeezed margins of bulk of the companies listed on Colombo Bourse as well as in the broader economy. However, the increased tariffs yielded benefits to the state run CEB leading to cut its persisted losses while reporting a profit of LKR 17 b as at the end of September. Further, Ceylon Petroleum Corporation (CPC) also witnessed a turnaround in 2013, reaching to its breakeven level prompting the government borrowing to be gradually reduced from the domestic banking sector towards the end of 2013 which resulted government one year treasury bill rate to reach a 26-month low level of 7.9% as at end of the year, marking its 12th straight decline in the weekly auction. Therefore, the relaxed monetary policies started yielding benefits towards the end of the year, directing market interest rates to fall steadily, giving ambitious hopes for 2014.Consequently, Average Weighted Prime Lending Rate (AWPLR) witnessed a steep decline of 452 bp (4.52%) over the last 12 months. Cheering External Sector Performances Country’s trade deficit seems improving from January to November, wounding the deficit by 10% y-o-y to USD 7.8 b primarily driven through the rising exports by 5.6% y-o-y coupled with the plummeted imports by 2.5%. However, the exports numbers were tumbled by considerable 4.5% over the 1H2013 and witnessed a strong recovery by October led by outstanding pick up in garment and textile exports by 46.8% to USD 436 m in October and followed by a sizeable 35% jump in November, posting the highest ever monthly export value for apparel sector. The gradual recovery in European Union (EU) and US markets were the major catalysts for the growth along with the seasonal demand while accounting an exponential growth numbers of 53.2% and 43.4% from EU and US markets respectively in October. US markets witnessed a further pick up in November too with an outstanding growth in apparel exports by 58%.On the other hand, import figures witnessed a significant fall over the 1H2013 by 5.8% led by substantial 12.8% drop in oil imports which represent virtually 25% of the country’s import bill. The above average rain falls witnessed during first six months resulted in an increase in hydro power generation while cutting the burden on importing oil for the thermal power generation. However, oil import bill witnessed a sharp rise by 61% in September due to the change in power mix biased towards thermal power, prompting to increase the year to date oil bill by 2.6% while putting the pressure on the overall import bill which eventually recorded a marginal drop of 0.7% y-o-y as at end of November. Worker remittances remained as the top foreign exchange earner for the country in 2013 too recording a substantial 12.7% growth y-o-y to reach at USD 6.1 b for first 11 months with a full year expectation of over USD 6.5 b, the highest ever worker remittances for the country backed by increased labour migration in the professional and skilled category. Tourism earnings, the fifth largest foreign exchange earner for the country as at 2012 is likely to be re-rated to the fourth rank soon due to the improved earnings by 36% to reach at USD 1.2 b for first 11months, surpassing the last year’s full year figure of USD 1.03 b. Further, the much needed Foreign Direct Investments (FDIs) strengthened the capital account of the Balance of Payments which grew at a rate of 42% to reach USD 870 m. At the same time, Banking sector recorded healthy foreign inflows via international bond issues totalling up to USD 1.5 b, predominantly supported with National Savings Bank’s (NSB) 5 year USD bond issue of USD 750 m at 8.875% coupled with the Bank of Ceylon’s (BOC) 5 year USD 500 m bond issue. Meanwhile, overall balance of payment surplus stood at USD582 m for the first 11 months of the year against the deficit of USD233 m recorded for corresponding period of 2012. Moreover, the country’s gross official reserves which reached to the lowest level of USD 5.52 b in February 2012, has now been strengthened to the level of USD 6.9 b, equivalent to 4.5 months imports. Amidst these relatively favourable BOP position rupee was stabilised around 132/- against USD towards the year end from its all-time low level of 135.90/- recorded in mid-August resulted due to the pressure of pulling out short term foreign investment amidst the prevailed uncertainty of tapering US cheap money program. The Rupee witnessed a reasonable stability in the LKR 127-130 range against the USD in the first half of the year but suddenly changed the outlook with the aforesaid uncertainty on tapering US Quantitative Easing program. Rupee has depreciated at a slower pace of nearly 3% against USD during the year compared to the considerable 12% depreciation reported in 2012. Fiscal policies for 2014 were also proposed in November which could be defined as an extension of the 2013 budget without introducing any major contractionary effects on the economy while focusing more on the SME sector, import substitution through local production, export growth with an extra attention on additional revenue sources for the government via extending Nation Building Tax (NBT) to Banking industry coupled with broadening the coverage for VAT on retail and wholesale business etc. In addition, post budget tax revisions have also seen during the year in terms of excise duties on liquor, cigarettes. Further, the import tariff of 10% on gold imports was also imposed to keep the local gold prices steady amidst the sharp fall of global gold prices. Sri Lanka hosted the CHOGM, the largest international gathering in the country after 1976, was one of the major highlights towards the year end, mounting fresh hopes in terms of foreign investments in coming years. The Sri Lankan visit of the high commissioner of UN Human Rights Commission Navaneetham Pillai ahead of a proposal on international investigation on Sri Lanka’s human rights violations allegations, was overheated the country’s political climate during 2013. The ruling party’s defeat in the Northern Province provincial election was also highlighted during the year. Overall, the economy reflects fairly positive sentiment towards the year end with easing inflation, lowering interest rates and strengthening external sector driving the current USD 59 b economy to reach at USD 67 b, growing at a real rate of nearly 7.2%. GLOBAL ECONOMY – ONE OF THE MOST VOLATILE YEARS IN RECENT HISTORY Global economy experienced a greater volatility in terms of global equity and bond markets, commodity prices etc, mainly owing to the uncertainty raised over the tapering of US Federal Reserve’s bond buying program. US economy commenced the year 2013 on a confident note, thanks to the deal reached to avoid the so-called fiscal cliff, helping to clear some uncertainties about the federal budget. The Taper Tantrum The so called ‘tapering’ which initially rattled the markets towards latter part May, by the comments made by US Federal Reserve Chairman Ben Bernanke who stated that the Fed may scale back on its bond buying program with signs of economic improvement. The signal that it could begin rolling back its bond-buying programme later this year rattled most global markets sending investors rushing for the exit whilst resulting in the worst market day in the US being witnessed during the latter part of June, with both the Dow Jones Industrial Average and S&P 500 recording their worst daily declines since 2011 dropping by 2.3% (or 353.87 points) and 2.5% respectively. Further, putting the question on everyone’s mind, when will the tapering actually happen? Additionally, given the foreign investors pulling out of cash from emerging economies amidst the rise in U.S treasury yields on expectations that the Federal Reserve will soon begin to taper, certain emerging countries including India, Sri Lanka witnessed a weakening in their respective currencies falling to record low levels. The stocks managed to re-gain the lost momentum in July touching all-time highs once again, amidst the cheerfulness of the investors created by the positive comments made by the Federal Reserve chairman Ben Bernanke that the monetary policy would remain and continue for a foreseeable future and the positive sentiment continued during August as well. However, all eyes remained on the Federal Reserve with regard to hits provided in this regard. For nearly seven months post to May, the global equity markets which were spooked by the word “Tapering”, finally got an answer with regard to the stimulus measure during its final policy meeting for the year, where the Federal reserve decided to trim its current pace of bond purchases by $10 b at a moderate pace lower than expected, amidst sign of recovery in the US economy; whilst pumping in $75 b to the economy by way of monthly bond purchases. Despite the decision taken with regard to the QE programme, stock markets did not overly react to this, as opposed to the initial hint provided in May which disturbed most markets including commodity markets, such as gold. US Government shutdown amidst countdown for looming debt crisis: Following the anxiety of tapering its monthly monetary stimulus, it wasn’t too long before uncertainty and fear flooding into the minds of investors once again resulted by a Government shutdown on 1st October 2013, after the congress failed to agree on a budget for the next fiscal year causing Federal agencies to send home about 800,000 workers furloughed without pay. The Patient Protection and Affordable Care Act (Obama Care) continues to be a very controversial out of range of reasons for the shutdown. This was further followed through a debt ceiling crisis, where the US treasury stating that it would run out of funds to meet its obligations by the 17 October, whilst leading to a probable risk of default as a result of the country not in a position to pay-up all its obligations in full. Amidst the shutdown being underway, during the initial weeks there was no favourable decision made by the Democrats or Republicans with regard to resolving neither the Govt. shutdown nor the Debt ceiling crisis. Nevertheless, following the 16 days of partial government shutdown and with less than a day before a deadline to raise the countries debt limit in averting the risk of a potential default, the US congress passed a bill to re-open the government and to raise the countries debt limit while easing the minds of many who were worried over the repercussions of the country defaulting in its debt obligations. The said measure has extended the Treasury’s borrowing authority until 7 February 2014. Further on, thousands of US government employees got ready to head-back to work after the US President Barack Obama signed a law ending a 16-day government shutdown and extending the US debt limit. US indices – Best year over a decade Despite the speed bump hit during May 2013, stock markets in the US witnessed a record setting year ending 2013 on an upbeat sentiment while logging its best gains since the 1990s, despite several setbacks in terms of Government shutdown, QE tapering fear and Debt ceiling crisis etc which sent US stocks on a roller-coaster ride mainly towards the second half of the year. The Dow Jones Industrial Average and S&P 500 soared in 2013 posting biggest annual gains since the late 90s. The DOW increased by 26.0% reporting all-time highs of 52 times during the year and the S&P 500 surged more than 29.0%. The NASDAQ gained nearly 40.0% reaching a highest level since 2000. European Indices – flying colours During the year, European Stocks too ended on a favourable note being a result of most markets in the region ending the year with substantial gains mainly resulted by the growing investor optimism on the supportive monetary policy by the central bank and easing of Eurozone crisis fears. Germany’s DAX took the lead under Europe’s main stock index witnessing a gain of about 25.0% in 2013. London’s FTSE 100 index gained more than 14.0%, and the stock index in Paris (CAC 40) leaped by 18.0% over the past twelve month period. Asia-Pacific Indices Japan: Amidst the economic policies adopted by Prime Minister Shinzo Abe commonly referred to as “Abenomics”, aimed at expanding Japan’s economy by way of unleashing monetary and fiscal stimulus program. The benchmark ‘Nikkei’ Index in Japan soared by providing returns over 55.0% while undoubtedly securing a place within the best performing stocks in the world for 2013. China: Stock markets in China lagged behind ending with disappointment mainly owing to liquidity squeeze or rather a cash crunch in banks due to tight policy measures, mainly during June and December period, glimmering worries over the world’s second largest economy. Further, this portrayed how thousands of retail investors remain at the mercy of government policy, while adversely impacting the market performance. During the year, Shanghai Composite Index fell by nearly 7.0%. Other regional Indices: The Hang Seng index in Hong Kong posted a gain just below 3.0%, Korean Exchange (KOSPI Index) a gain of 0.7%, Singaporean Exchange (Straits Times Index) a gain of 0.01% and Bombay Stock Exchange gain of 3.3% during the year. However the Philippine (-2.3%), Indonesian (-1.0%), and Thailand Stock Exchanges (-6.8%) etc. witnessed loses for the year 2013. HEFTY VOLATILITIES IN COMMODITY MARKETS Gold prices slumped by 28% YoY, the biggest annual drop in 3 decades post to 1981 The yellow metal commenced the year at the $1,670.00 (an ounce) levels and have been witnessing a gradual drop in prices up until mid-April 2013. On 16 April 2013, the metal witnessed a massive drop of 13.30% dropping by $208.00 while falling to a lowest level in two years amidst fears that, Cyprus may have a chance of selling-out some of its gold reserves in order to facilitate its bailout issues faced by the country. The imposition of a 50.0% tariff of Gold Imports by India, the world’s largest buyer of the metal led to a drop of 24.0% in the amount purchased by the country; followed by the drop in world market prices, Sri Lanka also imposed a tariff of 10.0% on imported gold. The prices continued to drop during May as well amidst the hint provided by the Federal Reserve chairman stating that, the US bond purchases would probably reduce in the coming months. However, post to that the metal started to gradually move up touching the $1,420.00 levels by the latter part of August. The trend did not sustain for long and once again in December, the precious metal continued to fall amidst the US Federal Reserve deciding to trim its monthly bond purchases by $10.00 b to $75 b a month. Crude oil to float either way during the year The commodity witnessed much volatility within the year mainly owing to the tensions in the Middle East. Having commenced the year at $111.11 and $91.65 respectively, Brent and WTI fell to its lowest level reached within the year by mid-April falling to $97.69 and $86.45 respectively. For the first time in nine months, Brent crude dipped below $100 level for the first time since July 2012 and WTI dropped below the 90$ mark, mainly triggered by the data indicating a weak demand from China and the United States. Post to April, oil prices started to edge up once again up until third quarter, with rising rigidity in the middle-eastern region, owing mainly to the problems in Egypt where massive protests came into took place in an effort of removing president ‘Morsi’ from power. The clashes worsened in July as well amidst the political turmoil in Egypt with the military deposing President Morsi, while resulting in the wrath of thousands of president supporters taking streets to fight against the Military; the country controls the Suez Canal and pipeline which move about 4 million barrels of oil per day while raising fears of supply disruptions. Adding further to the adverse pressures, on August 21 Syria was accused of using chemical weapons to attack rebel in areas of Zamalka, Ein Terma, and Erbeen, suburbs east of Damascus killing thousands; this caused the potential threat of the US ordering a military strike against Syria. Despite Syria’s tiny proportion of oil production (180K barrels per day) as against the worldwide production which amounts to 89 m barrels per day, the fear remains that the neighbouring countries will get dragged into the conflict, whilst resulting in disruptions for the production and transportation of the commodity in the region. Amidst these negative developments, oil prices witnessed a substantial rise where WTI reached $110.00 and Brent touching nearly $117.00 towards the latter part of August. Thereafter, the commodity started to reduce once again with the pressures easing-off to an extent, also coupled with the Iranian President Hassan Rowhani signalling his willingness build up positive-ties with the West, whilst agreeing on a temporary deal with five permanent members of the UN Security Council and Germany to Scale Back Nuclear Program, and In return the crippling sanctions against Iran will be eased, pumping between $6 billion and $7 billion back into Iran’s economy. During the final month of 2013, oil started to move up once again amidst the improving demand towards the year end, with Brent settling the year at $111.21 and WTI at $99.29. THE COLOMBO BOURSE – THE YEAR WITH AN ANNUAL RISE FOR THE FIRST TIME AFTER TWO YEARS The Colombo bourse began the year 2013 on an aspiring note with the credit ceiling being abolished from the commencement of the new calendar year further coupled the efforts taken by the monetary board of the central bank at several occasions to promote growth in economic activities by way of relaxing policy measures; TB rates reduced by 100 basis points within the year, and the 200 basis points (2.0%) cut in the SRR requirement etc. However, the overall market reaction wasn’t too favourable to changes in these measures; even if there was an immediate reaction, it wasn’t sustainable. Despite the highly volatile local and global vicissitudes which took place throughout the year, the benchmark Index of the Colombo Stock Exchange (ASPI) managed to gain +4.78% within the year, while surpassing the growth figures seen in several regional markets such as India (+3.30%), Hong Kong (+2.90%), Korea (+0.70%) and Singapore (+0.01%)etc.; this was having dropped by nearly 15.0% during the past two years, hence charting its first annual gain post to the 2009 and 2010 period where momentous returns of 125.25% and 96.01% respectively were recorded. From April to May period, the market gained a substantial 13.75% in just two months writing off loses charted during the previous months while crossing 6,500 boarder and reaching a highest level after 14 October 2011 (6,549.91); the rally was mainly post the 6 May 2013 where the market boosted up following to the acquisition of Lanka Ceramic PLC by Royal Ceramic PLC. Additionally, 15 out of the 21 market days in May witnessed positive closures, while making it the best month of the 2013 having witnessed a gain of 510 points or 8.28%. June turned out to be the worst month for the year, resulting in the ASPI index to fall by 342.05 points or 5.40%. On 23 May, the benchmark index reached its highest level for the year touching 6,515.79. The S&P SL20 index managed to gain 5.79% during the year closing at 3,263.87. CSE has also performed well during 2013 compared to the major emerging economies (BRICS countries) except South Africa which gained by considerable 17.85%. On the other hand, Brazil’s market lost by 15.5% followed by China with a -6.7% growth. Further, Russia up by marginal 1.99% and India jumped up by 3.3%. Foreigners led in front for the second consecutive year Foreign participants provided approximately 42.00% contribution to the total market turnover of the year marking a 5 year high, while increasing from its previous year’s 33.96% contribution. Foreign institutional attraction was mainly witnessed in blue-chip stocks such as John Keells Holdings, Ceylon Tobacco, Nestle Lanka, Chevron Lubricants, Commercial Bank etc. Foreign purchases for the year amounted to LKR 83 b, recorded a tiny rise of 1.19% as against its previously recorded, however due to a massive increase of 79.28% in foreign sales (LKR 60 b), the total net foreign inflow for the year which amounted to record LKR 22.7 b, registered a drop of 41.21% or LKR 15.9 b as opposed to its preceding year net inflow of LKR 38.6 b, the highest ever net foreign inflow to CSE. Furthermore, blue chip counters such as Ceylon Tobacco Company PLC (+42.70%), Nestle Lanka PLC (+33.80%), The Lion Brewery Ceylon PLC (+26.28%) and Distilleries Company of Sri Lanka PLC (+18.40%) belonging the Beverage Food and Tobacco (BFT) sector, Textured Jersey Lanka PLC (+67.03%) and Kelani Tyres PLC (+43.90%) under the Manufacturing sector, Lanka IOC PLC (+69.74%) belonging to the power and energy sector and Hemas Holdings PLC (+25.93%) coming under the Diversified Holdings sector managed to post substantial capital gains and provide noticeable returns to the investors within the year. The total turnover for the year 2013 was LKR 200.4 b indicated a drop of 6.25% as against its previous year, and the average turnover amounted to LKR 16.7 b. The total traded quantity for the year amounted to 9,054 m shares, charting a drop of 6.57% from 2012. Further on, a noticeable event which occurred during the year was the LKR 23 b worth of Right Issue by John keels Holdings PLC, the largest right issue in the history of the CSE for the purpose of raising funds for its proposed integrated development project while hindering the liquidity for the secondary market trading. An inactive primary market witnessed during 2013 where only two companies were listed on the CSE by way of an Initial Public Offerings (IPO). Adding further, the bond market slice of the capital market was strongly picked up in 2013 with a record amount of LKR 68.26 b were raised by way of 28 Debenture Issues as against its LKR 12.50 b raised during the previous year through 3 Debentures Issues. The bond market attraction was driven through the withholding tax relief granted by Budget 2013. Moreover, the picked up in the bond market has resulted a negative impact on the equity side of the market. Notably out of the Debenture Issue’s in 2013, National Development Bank PLC raised the highest amount (the largest listed Debenture Issue on the CSE) worth LKR 10 billion while accounting to nearly 15.0% of the total Debt Issues made within the year. ECONOMIC OUTLOOK – 2014 2014 welcomed with a policy rate cut – ambitious hopes Gradually relaxed monetary stance witnessed in 2013 was further strengthened on the first market day of 2014 by slashing Central Bank policy rates by 50 bp to stand at 8.0% while intensifying the growth prospects for the year. This move will speed up the downward adjustment of the market interest rates with the support of gradually reducing government borrowing from domestic market which clearly reflects in the continuous down fall of the short-term government securities rates for last 12 auctions, reaching its 2 year low level. This will induce more economic activities of the country with the support of easing inflationary pressures backed by less supply side constraints. Sovereign Bond issue will support the easing monetary policy and to appreciate exchange rates Sri Lanka Government issued its 6th sovereign bond of USD 1 b with the tenure of 5 years at an interest rate of 6% within the first week of January 2014 which was oversubscribed with 3 times. The US based investors had bought 62% of the issue while 89% of the issue has been subscribed by the fund managers. This highlights how confidence the western world on emerging economies even amidst the rising bond yields in US. This will curtail the government’s short-term domestic borrowing requirement for a reasonable time period, keeping the low interest rate regime more realistic in 2014. On the other hand, USD bond proceeds will keep the rupee less volatile or perhaps appreciate against USD for the first half of the year despite the pressure comes from the possible increase in imports due to the expected credit growth amidst relaxed policies coupled with the volatility, driven through US QE tapering. Fiscal Consolidation is a critical challenge in 2014 too The increased foreign borrowings will hurt the fiscal balance of the government, leading the interest servicing cost to be increased amidst the rising US bond yields currently hovering at 3% (10Year yield) ,owing to the tapering of US cheap money. Therefore, the fresh borrowings and revolving exiting foreign loans will become more expensive in 2014, causing a pressure on the government budget. Further, the upcoming elections including provincial in early part of the year and probably the presidential election in later part of the year will accelerate the government unproductive expenditure while hindering the domestic economic sentiment. Rebounding Global Economy to propel more dollars to External Account Global economic conditions show signs of improvement with Western economies moving towards gradual economic recovery in 2014 with an improved global growth forecast of 3.5% compared to the 2.9% in 2013. Further, the USA, the world’s largest economy and the consumer is expected to be grown at a healthy rate of 3.5% to 4% in 2014 as opposed to the expected 2.5% in 2013. This will intensify the gradual tapering process of QE program by the US Federal Reserve in 2014 while causing more challenges to the emerging economies. At the same time, the European Union countries are poised to grow at a slower pace of nearly 1% against the negative growth seen over the past couple of years. In line with the US recovery, China is projected to grow at 8.2% in 2014, up from the expected growth of 7.7% in 2013. Japan’s economy is expected to grow 1.5% in 2014, slightly down from expected growth of 1.8% in 2013. As US and Euro zone are the Sri Lanka’s major export destinations for manufactured products including garments and textiles, the accelerated growth in exports witnessed in latter part of 2013 is likely to continue in 2014 too while cushioning out the trade deficit. The proposed China-Sri Lanka Free Trade Agreement will also be a positive feature in terms of trade deficit. Further, the US-Iranian relations seem become strengthening and if it works out it could lead to the removal of trade embargos which may positively impact on local tea exports to Iran, the country’s second largest tea export destination. Moreover, this may lead to slash down the country’s oil import bill by increased oil imports from Iran. However, the geopolitical imbalances in Syria and South Sudan will result some volatiles to global crude oil prices. In addition, the ongoing low level of rain falls to catchment areas will hamper the hydro electricity generation, placing an extra burden on oil import bill for thermal power generation. The worker remittances, the highest foreign exchange earner for the country is poised to fast-track with the pick-up in global economies while tourism earnings will continue the last year’s positive growth. Stock Market to be benefited from Portfolio Rebalancing The developing low interest rate situation will create key challenges in-terms of investment yields to the Institutional investors and funds which has taken some extended exposure towards fixed income products. Therefore, those investor categories may extend their positions more towards alternative investments including equities within a calculated risk in 2014, being more favourable to the local stock market. As pointed out by the CB Governor in his speech on “Road Map 2014”, the Employee Provident Fund (EPF), the biggest pension fund in the country is set to take additional exposures in high yielding alternative investments in 2014 with improved skill set of their fund managers. This would be a green light in terms of the equity market where the additional funds likely to attract to CSE on selective basis. Emerging market economies which experienced a relative set back in 2013 in terms of equity investments are poised record a decent attraction in 2014 amidst relatively overvalued developed markets such as US, Japan etc. Further, the rising US bond yields will also affect negatively towards US stocks, which ended a record year with 26.5% gain in 2013. As per the economists of Bank of America Merrill Lynch, emerging markets economies’ share of world GDP would continue to grow in 2014. In this backdrop, global funds likely to watch out the emerging market equity investments in 2014 resulting healthy foreign flows to those markets including Sri Lanka too. Moreover, the deteriorated corporate earnings in 2013 may rebound with relatively sound revenue numbers, fuelled by the expected growth in credit which is expected to stem from the relaxed interest rates. Further, the bottom line numbers too will witness an improvement due to the possible reduction in finance cost. Local political climate to overheat with few global events The Geneva Human Rights session (UNHRC) to be held on mid-March would be a crucial event for Sri Lanka from both Political and Economic perspective. At the same time, the outcome of the India’s general election which is planned on May will also influence the local political environment where the ruling Congress party is expected to be overpowered by the current opposition, Baratiya Janata Party (BJP). As per the comments made by few political analysts, BJP is more against with the China and Pakistan where it will have an adverse impact on Sri Lanka’s close relationship mainly with China. Further, the BJP’s close relationship with Tamil Nadu is also considered to be detrimental to the local political stance.   Local Financial sector stability will become a focused area The country’s banking and financial sector is expected to undergo far reaching structural changes with mergers and acquisitions of banks and finance companies while strengthening financial system stability. Hence, CBSL has called proposals from the small scale banks and finance companies for possible M&A opportunities; thereby the year 2014 is expected to be flooded by more M&A activities. [This article was written by Pasindu Perera (Manager – Research), Nishantha Warnakulasuriya (Research Analyst) and Lasantha Senanayake (Research Analyst) of Asha Phillip Securities Ltd., with the auspices of the Research Committee of Colombo Stock Brokers Association.]