Sri Lanka Newspapers Monday 19/03/2012

Govt bullish on US$ 500 m foreign equity target for capital market - CB Governor
*Khazanah deal has triggered positive foreign fund manager sentiment
By Ravi Ladduwahetty

The Government is extremely bullish in its target of UD$ 500 million in foreign investment flows into the Colombo Stock Market, which it expects to be a reality before end 2012.

The Central Bank announced in its road map that it has targeted US$ 500 million in terms of inflows from Foreign Fund Managers into the Colombo Stock Exchange and out of which there has been around US$ 140 million through the just concluded Khazanah Fund of Malaysia deal with John Keells Holdings PLC which yielded around US$ 120 million as well as others who accounted for another US$ 20 million, Central Bank Governor Ajith Nivard Cabraal told The Island Financial Review yesterday He also said that there was lots of foreign interest in the equity market which also meant that there was lots of scope for the development of the market with top blue chip corporate reporting excellent earnings and growth prospects which has been triggered from last Friday’s deal which was also the second largest ever transaction which crossed the floor of the Colombo Stock Exchange as well.

There has been a lot of inflows into various market portfolios and foreign fund managers are seeing value in the market with excellent growth prospects,

Meanwhile, John Keells Stockbrokers CEO Thivanka Ratnayaka said that the interest shown by the foreign fund managers following the Khazanah acquisition of John Keells Holdings PLC was an ongoing process of value based positions which was very encouraging.

The interest is on right now despite their were no specific transactions on at the moment, he said, adding that JKSB were putting the finishing touches to the Kazanah deal.

Top market sources also said that the government should also get Singapore’s Temasek, the Singaporean government ‘s investment arm to invest in the Colombo Stock Exchange in the wake of the success in the Khazanah deal and also the Templeton Fund of Mark Mobius and the world’s biggest equity investment portfolio – Berkshire Hathaway of business magnate Warren Buffet here as the returns that he reaped was less than 20% since the crash of the US economy in 2008.

Of the other foreign fund managers – JP Morgan, has also opened a Colombo office and has recently bought into Expo Lanka as well. There is also the Aberdeen Fund and the CF Ruffer Fund of the UK which are already in Sri Lanka, the latter which has been acquired by CT Capital.
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*Huge JKH deal gives EPF Rs. 800mn capital gain, but only time will tell whether the exchange would recover

The Colombo Stock Exchange is the worst hit among frontier markets and only time will tell whether or not the huge Rs. 14.5 billion trade last Friday involving the sale of JKH shares held by the EPF to a Malaysian government controlled fund, Khazanah, would uplift sentiments as the high of cost credit hold back speculators.

Central Bank Governor Ajith Nivard Cabraal told The Sunday Island that the capital gain from the transaction was around Rs. 800 million.

"As retails go into hibernation, the institutional market has to become very active this year. On Friday the 16th the Malaysian Sovereign wealth fund made a massive purchase of JKH showing confidence in the Sri Lankan economy. The foreign interest being generated this year is a positive sign for the larger economy; however we are yet to see this positive move flow into the speculators who are most likely being held back by the higher cost of credit," Bartleet Religare Securities (BRS) said.

"The Colombo Stock Exchange has lost 10% YTD. It has lost 19% YTD when taking the currency into consideration which has depreciated to 125 to date from 114 this year against the USD. This puts CSE amongst the worst hit exchanges in the frontier markets group. Other markets such as Vietnam and Pakistan have gained 24% and 18 % YTD respectively along with other global indices which seems to be more correlated with global affairs. This makes Sri Lanka an interesting opportunity for global value investors who seek alpha. According to Bloomberg the Sri Lankan markets is now trading at 11.50 which is in aligned with the SP Asia 50 index which is currently trading at a multiple of 11.13.

Other markets are trading at much higher multiples.

"The ASPI has been trading in a range of 5,000 and 5,650. Since the downfall of the market in February 2011 we are yet to experience a solid bear market rally. The market has made a temporary bottom at 5,000 for now and a bear market rally at these present levels could be in the cards. This would take the index towards 6,200. On the downside however if we continue to see selling pressure we are likely to break 5,000 and head towards 4,400 the market’s 200 weekly moving average. We are correctly going through a period of consolidation and the market is yet to decide which way it wants to go," BRS said.
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*Rupee falls to new low despite huge inflow to stock exchange

Interbank borrowing rates were seen stabilising with the Central Bank no longer printing money to help banks with liquidity issues, latest data from the Central Bank showed while the huge stock exchange deal featuring the EPF and JKH failed to buoy the rupee, which fell to a new low against the greenback.



With rupee liquidity drying up on account of the Central Bank selling dollars to keep the exchange rate stable, around Rs. 300 billion had been printed since August 2011 to keep help commercial banks unable to maintain their overnight balances and to keep interest rates low. Since February 01 to date, the bank had printed around Rs. 107.73 billion but no longer intervened this way since last Tuesday (13).

The banking system had also borrowed Rs. 82.5 billion via the reverse repurchase window of the Central Bank since February 01, but last Friday (16), commercial banks did not use this window.

Since peaking at 10.11 percent on March 09, the overnight call market rate for borrowings not backed by security stabilised to 9.53 percent on Friday. The overnight market repo rate for interbank borrowings backed by securities stabilised to 8.69 percent, after peaking at 8.98 percent on March 9. The March 09 peaks had been the highest these rates had gone since the end of the conflict in May 2009.

The overnight Sri Lanka Inter Bank Offered Rate has eased to 9.70 percent last Friday since reaching 10.19 percent on March 09.

The rupee fell further to a new low against the dollar on Friday with the huge US$ 116 million deal involving the EPF selloff of JKH shares to Malaysian government controlled Khazanah Nasional not doing much to buoy the rupee against the greenback.

The rupee which opened the day at Rs. 125.0/25 against the dollar fell as low as Rs. 126 despite the huge deals, with currency dealers saying the dollars were absorbed directly by the Central Bank. The rupee closed at Rs. 125.60/70 against the dollar on Friday, although no trades were quoted at Rs. 125.70.

The rupee has fallen 13.76 percent from a year ago where the rupee had traded around Rs. 110.39 against the dollar. The rupee traded at around 114.30 early in February before the Central Bank decided to refrain from intervening in the foreign exchange market and increase monetary policy rates and cap commercial bank credit growth in belated response to a balance of payments crisis. Since then, the rupee had fallen 9.8 percent.

Meanwhile, the average weighted prime lending (AWPR) rate offered by commercial banks to high net worth individuals and corporates has increased to 12.27 percent last week from 9.25 percent a year earlier.

"These rates our offered to the top clientele of a bank with goof credit worthiness and excellent relationships. Ordinary borrowers are offered much higher rates than these," a currency dealer said.

A breakdown of bank-wise AWPR is seen in the following table.
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Sanjeevi JAYASURIYA
Currency devaluation has posed challenges for certain sectors and this has called for vigorous cost reduction strategies to mitigate the negative impact. The reduction in absolute value perspective is large in the downward revision in the growth forecast for this year. However, the sound macro economic environment in place will support the business growth despite the adverse external factors, Chevron Lubricant Lanka Managing Director and CEO Kishu Gomes told Daily News Business. As the country is heavily dependent on imports, currency devaluation may lead to rise in inflation thus raising the cost of production by having a negative impact on disposable income. Our venture being a non petroleum producing entity, profitability will affect in the long run, he said.

The recent increase in fuel prices which directly affect the transport sector will in-turn reduce the demand for lubricants as there is a co-relation between consumption and price. This will have a negative impact on the lubricant industry where a new plan of action is necessary. We are faced with stiff competition from 13 competitive players in the market and the North and the East market growth was slow during last year. However, increase in the vehicle population, reduction in taxes supported by Maldives and Bangladesh wealth intensification drove volumes and margin growth, he said. The company's strategies enabled it to save operational expenses and the reduction in the corporate tax from 35 percent to 28 percent also complemented this effort.

However, this year will pose huge challenges as currency stabilization plays a crucial role in company performance and the increase in the fuel prices will cut down on vehicle movement. The lubricant market will be further affected by the rising inflation and reduction in disposable income.

These serious and new challenges were not anticipated at the beginning of the year. 'Despite the unfavourable conditions we expect positive market growth where we will be able to better company performance this year too. We need to adopt new strategies to overcome changes in the landscape to re-shape the country's lubricant industry, 'Gomes said.
http://www.dailynews.lk/2012/03/19/bus02.asp