Colombo stock market remains an attractive avenue for investment

By Gayan Chandrasekara
Jan 01, 2014 (LBO) – Sri Lanka’s stocks rose 4.78 percent in 2013 with companies raising over 100 billion rupees in debt and equity, as foreign investors bought into the markets for the second year in a row.

In Japan stock surged 52 percent driven by money printing and China fell 6.8 percent as largely state-led credit bubble burst.

There was a broad recovery in Western markets with the recovering US up 30 percent and even troubled Greece up 24 percent.

In Sri Lanka stock values rose 13.4 percent to 2,460 billion rupees up from 2,167 billion rupees a year earlier.

Foreign investors who dumped stocks in the bubble years are now returning to Sri Lanka being net buyers for the second year in a row.

Foreigners pumped in 34.1 billion rupees to Sri Lanka stocks in 2013, down from 40.2 billion rupees in 2012.

There was a non-market-driven surge of corporate debt triggered by a one-off state intervention where unprecedented tax breaks were given to listed bond holders. Among the largest purchasers of the tax free bonds were banks.

Listed Firms raised 68.3 billion rupees from 28 bond issues up from 12.5 billion rupees a year earlier.

Companies have raised 119.4 billion rupees from the capital market, topping last year's 29.58 billion rupees.

Sri Lanka's market gain comes amid as the island recovers from a balance of payments crisis triggered by state energy subsidies financed by bank debt which worsened a credit bubble.

In 2011 the benchmark All Share Index fell 7.1 percent on top of a 8.5 percent fall a year earlier as a credit bubble burst.

Sri Lanka's S&P SL20 index of large liquid firms which replaced two firms to rebalance the index this month reported a 5.79 percent growth.

According to stock exchange data 57 companies have showed a total return in excess of 15 percent in 2013, 26 companies have returned above 30 percent.

The beverage, food and tobacco sector has climbed up to top with 28.01 percent growth over the last year while power and energy sector recording a 19.51 percent growth.

Information technology performed worst, falling 27.33 percent. The trading sector fell 21.39 percent.

Japanese stocks rose 52 percent driven by the so-called 'Abenomics' money printing exercise, where its negative fallouts are expected to hit the economy in the future.

Already inflation is up and the currency is down hurting savings of Japan's ageing population, though the real burden of heavy state debt is falling at their expense.

Mumbai's BSE Index was up 9.0 percent, Shanghai's Composite Index was down 6.8 percent with a price earnings ratio of 8.1 times according to Bloomberg data.

China is recovering from a credit bubble, partly worsened by state-led 'stimulus' in the wake of the global financial crisis, which has increased mal-investments by state connected entities.

Germany's DAX index rose 23 percent, France's CAC index rose 18 percent, Spain's IBEX rose 21 percent. Greek stocks rose 24 percent. America's S&P 500 rose 30 percent.
www.lbo.lk

Sri Lanka YTD country performance wise 51st out of 76.

http://sharemarket-srilanka.blogspot.co.uk/2014/01/final-2013-country-stock-market.html

The Colombo Stock Exchange (CSE) during 2013 provided an attractive prospect for investment with a 4.78% increase in the All Share Price Index (ASPI) and a 5.79% yield on the S&P SL20 Index (S&P 20).

The ASPI indicated the most notable increase in comparison to previous years, where 2012 and 2011 exhibited negative percentage changes of -7.1% and -8.5% respectively.

Bank interest rates decreased during the course of the year, following a directive by the Central Bank of Sri Lanka to tighten monetary policy; interest rates (Average Weighted Fixed Deposit Rate) have dropped from 13.21% on 31 December 2012 to 11.96% as at 29 November 2013.

The market witnessed certain selected stocks performing exceptionally, providing high yields to investors who diversified their investments over a range of equities. A total of 57 companies have given a total return in excess of 15% year on year for 2013 (with 26 companies giving a return above 30% and 31 companies giving a return between 15 to 30%).

The year also saw a total of Rs. 119.4 billion capital being raised through the stock market, with corporate debt amounting to Rs. 68.3 billion. The total capital raised during the year surpassed that of the previous year, which closed at Rs. 29.58 billion.

The CSE continued to attract foreign investors with a net foreign inflow of Rs. 34.1 billion (excluding the net flow for corporate debt), building on the net foreign inflow of 2012 at Rs. 40.3 billion.

This was supported by Sri Lanka’s higher positioning in regional capital markets, being one of the top performers within the region ahead of the Singapore Stock Exchange, the Bombay Stock Exchange and the Hong Kong Stock Exchange.

Capitalising on the attractiveness of the market, the CSE in association with the Securities and Exchange Commission (SEC) will host a Foreign Investor Forum in Singapore on 20 and 21 January 2014 to attract foreign institutional investors. A series of local and foreign investor forums are planned for the coming months, to reach out to international intuitional and high net worth investors, as well as local investors.

In a bid to encourage local investors and better educate existing investors the CSE has conducted a number of investor education programs throughout the island and will continue to educate the public on the various opportunities for investment available in the Sri Lankan capital market.

The Colombo Stock Exchange (CSE) operates the only share market in Sri Lanka and is responsible for providing a transparent and regulated environment where companies and investors can come together.
The CSE is a company that is limited by guarantee established under the Laws of Sri Lanka. The CSE is licensed by the Securities and Exchange Commission of Sri Lanka (SEC) and is a mutual exchange consisting of 15 Members and 14 Trading Members. All Members and Trading Members are licensed by the SEC to operate as Stockbrokers.

www.ft.lk

By First Capital Equities

Disappointing ASPI performance
The bourse is up only 1.4%YTD (dollarised) in 2013, having underperformed against major developed and emerging markets this year. Despite this, bluechip stocks in the food and beverages, healthcare and banking sectors have reported double digit gains supported by foreign buying.

3Q2013 GDP growth accelerates to 7.8% with 2013 full year growth targeted at 7.0%
Outperforming nearly all other world markets, Sri Lanka’s 3Q2013 GDP grew by 7.8%, significantly above the 6.8% and 6.0% growth rates achieved during 1Q2013 and 2Q2013. Growth was spearheaded by 8.1% and 7.9% rise in the industry and services sectors while the agricultural sector recorded a growth of 7.0%.In terms of 3Q2013 sectoral composition, the services sector accounted for 59.0% of GDP while agriculture and industry represented 11% and 30% respectively.

With momentum expected to continue into 4Q2013, we expect the Government to achieve a 2013 full year GDP growth rate of 7.0%, amongst the highest economic growth rates in the world for 2013. Growth will be driven mainly by domestic factors while foreign capital flows should provide further support.

Net foreign buying down but not out
Notwithstanding eurozone debt tensions, most global equity markets rose during the year with foreign funds flowing into both developed and emerging market equities. Foreigners continued their buying spree with net inflows of Rs. 21.0 billion ($ 159.0 million) recorded so far in 2013, indicating their confidence in Sri Lankan equities despite a disappointing ASPI performance. Notwithstanding generally subdued domestic investor sentiment, bluechip stocks have attracted foreign investment.

Interest rates decline
Interest rates declined during the year with the weighted average deposit rate, prime lending rate and 12month T-Bill rate falling by 60 bps, 450 bps and 340 bps to 9.5%, 9.9% and 8.3% in November 2013.

Debentures mop up liquidity
Significant amount of debentures offered so far this year has reduced the appeal for domestic equities. Notwithstanding our expectation of a further softening in interest rates, companies have raised cash via debenture issuances which has had a direct impact on stock market turnover levels. Total funds raised via debentures in 2013 so far by corporates have crossed the Rs. 71.6 billion ($ 542 million) mark and with more and more institutions opting to generate funds via the debenture route, the likelihood of more debenture issues to be announced during 1Q2014 appears generally likely.

Uneventful 2014 Budget
The Sri Lankan Government unveiled a relatively uneventful 2014 Budget aiming to achieve a 2014 economic growth of 8.0% while targeting a budget deficit of 5.2% in 2014 (compared to 5.8% in 2013), falling further to 4.5% in 2015 and 3.8% in 2016. The Government has forecast 2014 total revenues of Rs. 1.47 trillion, while 2014 total expenditures have been forecast at Rs. 1.99 trillion (compared to 2013 total revenues of Rs. 1.20 trillion and 2014 total expenditures of Rs. 1.71 trillion respectively).

2014 themes
GDP growth will continue unabated at7.0%+ for 2014. However not all sectors and sub-sectors would benefit equally. Companies operating in F&B, construction, hotels and banking (select) are likely to record the most significant growth.
• EPS growth to recover in 2014 as a result of improved margins resulting from a decline in inflationary pressures. We advise investors to seek cash rich companies with strong free cashflows.
• Valuation multiples such as PE will continue to remain attractive vis-à-vis other emerging/frontier markets which could lead to increased foreign buying in the Sri Lanka bourse in 2014.
• Likelihood of reduced competition from alternative asset classes such as money market instruments and real estate investments which may result in a flow of funds back to equities.
• Bourse could rise in modest double digit terms with fundamentals overpowering momentum trading led by rise in bluechips.
• Investors advised to break away from the herd, maintain a healthy investment horizon and focus on investing in companies that will deliver quality earnings in 2014.