Sri Lanka’s stock market is ranked among the most expensive stock exchanges in the world, as its valuations suggest that its traded stocks are over-valued, a perception similar to that of developed market equities, a poll conducted by United Kingdom’s Chartered Financial Analyst (CFA) Society showed.
According to UK CFA’s latest valuation index, which compiled data for 35 stock markets across the world, Sri Lanka’s equities are ranked among mostly developed markets, such as United States (US), Switzerland, New Zealand, Germany, Australia and Finland.
Among other similar valued stock markets are India, Mexico, Israel and Thailand.
Indonesian and Belgium stocks are ranked as the most expensive while Chinese stocks are among the cheapest.
Chinese stocks fell most on January 1, 2016 dragging Asian, European and US stocks. Among the other cheapest stocks are Hong Kong, Japan, Russia, Spain and Turkey.
The gauge is based on three valuation models – the commonly used Price-to-Earning (PE) ratio, cape – cyclically adjusted price-to-earning ratio and price-to-book ratio.
The study measures the PE ratio of Sri Lankan stocks at 12.8 whereas US stocks have a PE of 20.7 and China’s is 6.4.
The PE is the most commonly used valuation measure and it compares the price of a share with the earnings that are produced with each share. Higher the PE, higher the value of the stock.
The cyclically adjusted PE ratio is arrived at using the average of the previous ten years’ earnings and thus is a more stable measure than the PE.
Sri Lanka’s cyclically adjusted PE is measured at 21.1 whereas the US’s is 24.6 and China’s is 9.9.
Price-to-book value is the ratio between the net asset value of the firm and its share price. Higher the ratio, the higher the value of the stock.
Sri Lanka’s shares have a price-to-book value of 1.8 whereas the US’s is 2.8 and China’s is 1.1.
Sri Lankan stocks have been falling as the investor sentiment is low, given the rising interest rates and the bleak outlook for businesses in 2016.
Investors are seen shifting from equities to high yielding fixed income securities expecting further monetary tightening by the Central Bank in the coming months.
Year-to-date net foreign outflows have been Rs.1.54 billion from the Lankan equities.
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