In recent days the market has seen support levels increasing and some stability returning largely on the back of satisfactory earnings releases.
The positive quarterly earnings growth running up to low twenties (with corporate earnings released, at the time of writing, including the listed Indian fuel retailer representing net profit growth of 23.5 percent) was more of a positive surprise than a consensus driven expectation.
Albeit a few expected this reality on the premise that Sri Lanka’s natural economic growth rate hovers around 6 percent and if inflation is kept at controllable levels, along with stable income flows to the public and a tad bit of positive sentiment would be sufficient to drive consumption.
"In the next few weeks we could expect the ASPI to be choppy given the selling pressure on few large-cap counters offsetting the buoyant earnings growth recorded by bulk of the listed companies"
Nevertheless the All Share Price Index (ASPI) is still down year-to-date while having dipped faster at 3.7 percent since the January 8th Presidential elections.
With UNP-led coalition in power and controlling the cabinet, market over expected the possible economic incentives which may come forth, but instead the interim budget proposals was a dampener on equity markets.
Further some of the haphazard revenue collection methods and new taxes, which are still not finalized has created ambiguity among the business circles. Therefore the market which gained soon after the elections had fallen at a 2.1 percent, since the announcement of the interim budget in January.
However around 136 companies have released their quarterly earnings at the time of writing and 135 companies (excluding the loss making Indian owned fuel retailer) have reported a staggering 31 percent year-over-year growth in net profits.
This performance bodes well with the investors and traders while giving a confidence boost on what to expect in future. Then market speculation is rife on the possible acquisition of a strategic stake in a listed commercial bank by a competitor.
With this expectation the market had driven up the share price of the target bank and also has re-rated the entire banking sector which has strongly assisted in the index recovery.
Local HNWI’s reentering the market and taking positions triggered a retail following while activity levels in smaller-cap stocks also picked up. Domestic institutions too broke away from their cocoons and are becoming active. Arrival of the dividend season too had assisted in ramping up local market activity, given the stickiness of market interest rates picking up counters with high dividend yields has become an option which is gathering momentum.
Foreign investor appetite
With local participation in the Colombo bourse somewhat robust, daily turnover levels have averaged around Rs.1.2 billion but seems to be stagnating given the poor foreign investor appetite. Foreign activity has slowed dramatically, and has halved from the previous 30 percent participation levels. Domestic political developments, back-and-forth policy announcements and indecisiveness displayed by the government has not bode well with the international portfolio investors.
Further the parliament disrupting policy implementation along with strong criticism by the opposition levied against the recent domestic bond issue and few cabinet ministers has managed to caste serious doubt in the minds of foreign investors with regard to President’s and the UNP led government’s ability to create a apolitical governance framework and democratization process promised during the Presidential polls in January. Indecision regarding the right-to-information-bill, the parliamentary elections and timing of the same are creating a prolonged ambiguity which is not good for trading at the Colombo Stock Exchange.
The state sponsored infrastructure projects which was temporarily halted are expected to be given the green-light after the construction contracts are re-negotiated. If the national coffers are to benefit from this exercise without compromising the quality and suitability of the infrastructure assets, it is all good and should be looked at positively, though the long wait is making foreign portfolio investors impatient. Then the SL Rupee is also on the decline, and rightly so, since while running a negative trade balance which is larger than the other forex remittances would make it impractical for the local currency to head in any direction other than South. The SL Rupee decline was further aggravated by the foreign portfolio exits (chiefly on the bond side) and the reluctance of exporters to convert their hard currency.
Pressure on local currency
However the recent issue of US$ 650 million 10-year bond has managed to arrest the Rupee decline and stabilize the currency at a marginally stronger position.
Despite this short term boost, the local currency could be under pressure at least till the end of Parliamentary elections, since speculation of further currency weakening is creating a vicious cycle with exporters holding back Dollar conversions and foreign portfolio investors (on the debt side) been more on the sell side citing the lack of clear economic policy direction by the ruling policy makers.
Nevertheless it should be noted that foreign portfolio investors to the equity market were net buyers in May to the tune of Rs. 2.4 billion. Despite this revived foreign and local HNWI interest the All Share Price Index (ASPI) remains sticky due to the selling pressure on few index heavyweights which had lost interest on grounds of valuation and inability to carry out projects which they earlier envisaged.
Therefore in the next few weeks we could expect the ASPI to be choppy given the selling pressure on few large-cap counters offsetting the buoyant earnings growth recorded by bulk of the listed companies. Also investors and traders are preferring to be slightly more cautious given the political tug-of-war ahead of the parliamentary elections.
(Danushka Samarasinghe is the COO of Softlogic Stockbrokers and has been involved in Sri Lanka’s capital markets since 2002, before which he was attached to MAS Holdings. Also he currently serves as the Chairman of ACCA Member Network - Sri Lanka)