Lankan equities offer attractive valuations - report

10 December 2012 03:04 am - 0 - {{hitsCtrl.values.hits}}

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Foreign investors will continue to invest in the Colombo Stock Exchange based on attractively low valuations of Sri Lankan equities particularly against regional emerging and frontier markets, according to a report from NDB Stockbrokers (Pvt) Ltd.

Sri Lankan stocks, according to NDB’s estimates, are currently trading at a forward Price/ Earnings (PE) of 11x whilst regional markets are trading at a forward P/E of 12.8x.

“With the expected improvement in profitability and economic stability over the next two years, we maintain our expectation that the forward P/E would reach 15x with improving investor sentiment,” the report stated.

Citing improved foreign inflows, which reached Rs.33 billion up to October, a complete reversal from last year’s net outflow of Rs.19 billion, NDB asserted that foreign investor confidence in the market will continue to improve.

“Foreign investors have been bullish on Sri Lankan equities since early 2012. This indicates that the value investors perceive upside potential in Sri Lankan equities in view of positive policy measures taken in 2012 and the prospects of impressive growth over the next few years,” the report stated.

“We maintain our ASPI target of 9,000 by the end of 2014. Sentiment is likely to improve gradually and pick up steam by 2013H2 in view with prevailing uncertainty in global economies and high domestic interest rates,” it noted.

The report cited improving foreign investor confidence based on attractive valuations, particularly when against regional emerging and frontier markets, and strong economic growth prospects as a basis for its positive forecast.

Domestic interest rates will however have a significant impact on market sentiment, with lower rates likely to boost investor confidence at a time when equity selling pressure has reduced drastically as the number of IPOs and rights issues declined over the last 12 months, pushing many towards the security of short term fixed income instruments.

NDB forecast a marginal easing of market interest rates over the next 6 month period due to the success of policy measures to ease credit growth. However it noted that continued non-bank borrowing by the government could serve to significantly reduce the decline.

Local interest rates are also likely to be partially driven by developments with regards to the USA and its ‘fiscal cliff ’, which the report states will have a direct bearing on Sri Lanka and the rest of the world.

The report stated that lower interest rates in the USA will in turn cause global interest rates to trend downwards, providing the country with an opportunity to secure funding at lower costs.

“Since the global financial crisis in the latter part of 2008, USA has maintained its policy rates (Federal Funds Rate) at historical lows. Accordingly, the market interest rates also have been at historical lows. It is indicated that the interest rates will likely be low over the next 2 years.

Since the global interest rates are benchmarked on rates in USA, global interest rates (apart from the highly leveraged regions such as Greece where there is a significant default risk) would also hence be low over the next 2 years.

“This provides an opportunity for countries with acceptable credit ratings and high growth prospects (such as Sri Lanka) to raise funds at a relatively low cost,” the report noted.

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