I have listed below the reasons why I am so pessimistic about the current investment opportunities in the Colombo Stock Market.a) Interest rates are on its way up.
From as low as 7% p.a interest rate few months ago the rates are spiraling upward with each bank competing with the one another to attract deposits. Few weeks ago I noticed one of the leading listed commercial bank (Nation Trust Bank) offering 12% p.a for 6-12 months deposits via email campaign few days later be out done by Pan Asia Bank with a offer of 15% p.a for 5 year deposits. With this trend 20% p.a is not impossible!!
As a depositor I am delighted to see this kind of increase in interest rates, which will make my money work for me without my having to work at all. If interest rates are going to be above 15%p.a it may not be a bad idea for me to sell all my business including stock market investment and deposit everything in a fixed deposit. Tell me any business that could guarantee you 15% Net Profit per annum without any risk!! Wow is going to be wonderful!!
Although I am delighted personally the impact of interest rates to the economy is likely to be horrendous. High interest rates will drive away the investors from stock market towards debt market, drying the opportunities that prevailed in the capital market for companies to raise low cost equity funding for their operations and future expansions. Alternatively companies will now have to resort to borrowed capital which will significantly reduce the future profitability and corporate earnings. This will further have a significant impact on the stock valuations and market capitalization. Will stock market slump further!! ASI 4000??... only time will tell us.b) Sri Lankan Rupee devaluation
You hear every where, that Sri Lankan Rupees is likely to be devalued soon!!. Some say its 5% others say its by 20%. This apparently to reduce the pressure on Sri Lanka's Foreign currency reserves and resultant high interest rates. Whatever is the case, this is likely to have sever impact to the economy. Can devaluation of the rupee could solve the current crisis. To me, answer is no !!! Sri Lanka is a import driven economy and any devaluation in of the rupee is likely to have a significant impact on inflation (The Cost Push Inflation) and intern the cost of production and services of all companies and industries. Among our imports Crude oil remain one of the biggest import cost to the country and any notable increase is likely to have a significant impact to all sectors of the country including high depended Transport, Electricity, manufacturing sectors.c) Iran Crisis.
Crude oil crisis is far more than a domestic problem. Sri Lanka imports significant component of oil from Iran. I guess its over 90% of total imported to Sri Lanka. This is as a result of generous credit period offered by the Iran. Under the current crisis and impeding embargo's Sri Lanka will be compelled to purchase oil from alternative sources. Further if Iran proceed with its own embargo's then it is likely to that world crude oil prices will reach record high resulting in sever crisis across the world.What is good to buy and what is not!!Banks
I would buy Banks. Coz bank would be a beneficiary in an high interest rate environment due to higher interest spread. Commercial Bank, HNB, NDB and Sampath seems quite attractive.Hotels
I would buy hotels coz as a result of Rupee devaluation Sri Lankan hotels would cheaper and more attractive to the foreigners. Rupee earnings of hotels are likely to increase resulting in higher corporate earnings.Motor
I would sell out of Motor Trading Companies such as DIMO, United Motors, Sathota, Colonial etc coz high fuel cost and depreciation of the rupee will reduce the short to medium term demand for motor vehicles. High interest rates also will dicourage people from taking leases. Plantations
Significant component of Sri Lanka's tea is exported to Iran, Syria and to other arab countries. Any benefit we are likely to derive from the devaluation of the rupee is going to be off set by the likely reduction in demand for tea from Iran, Syria and Middle Eastern Countries due anticipated crisis. So I will not touch tea. But natural rubber is likely to be high in demand as a result of the higher cost of artificial rubber due to expected increase of crude oil. Good luck for rubber plantation.Above post is a personal opinion of the writer based on current local and global events purported to be affecting the Stock Market and should under no circumstances be considered as Research or Recommendation to buy or sell shares