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By MarketsNeverLie
A bear market can be catastrophic for any economy, especially an emerging one which does not understand the ramifications of such conditions. A bear market can bankrupt an innocent small investor who bought Soft logic (SHL) shares at LKR 29 on leverage and now is paying interest which he cannot afford on a stock that currently trades at LKR 10 and is expected to go down to LKR 8.
A bear market can slap and spit at the face of a supposedly healthy company that is generating strong revenues such as Peoples leasing (PLC) which was heavily promoted at LKR 18 and currently trades at LKR 11 and has a target price of LKR 9 on it.
A bear market can disgrace and ridicule a central banker who promises 8.5% growth over the next decade, the sun and moon full of foreign direct investment (FDI) pouring into Sri Lanka and boast about a stable economic environment.
A bear market can crush a country’s currency, play havoc with inflation and abuse the macro economic landscape of a country. Yes, a bear market can be quite detrimental to an economy but the worst thing about a bear market is the fact that no one wants to accept her faith, understand her reasons and learn from her mistakes which have ripple effects that can last for years.
Sadly all the salesmen in the country only continue to feed the public a spoon full of sugar so that the bitter medicine can go down.
WAKE UP SRI LANKA!
MarketsNeverLie 1 year forecasts (probability 70%)
* All Share Price Index to head towards 4,000
* The Rupee to head towards 140-150
* 3 month interest rates to move towards 14% and the yield curve to flatten
8 reasons behind my forecast
Technical view
I expect the All Share Price Index (Chart A) to come down to 4,000 which is the markets 61.8% Fibonacci level. Historically during bust phases markets usually head towards these levels. It is difficult to forecast the intermediary swings within this range but the end result has a 70% probability.
Rising interest rates
We are currently seeing a rising interest rate cycle and historically these cycles can last for 1 or 2 years. The rates have currently increased 40% YTD, however technically I see the 3 month yield increasing another 100 to 200 basis points towards 14%. Simply a rising interest rate environment causes stocks and bonds to fall.
Beware of central bank and government forecasts
Even though the central bank continually talk about large sums of foreign direct investment (FDI) and other window dressing statements, realistically we should question it with a bowl of salt.
We cannot keep relying on the IMF or China for money, this makes me question the stability of the currency and we could see the currency move towards 140 - 150 in the coming year. Given the VOLATICS (Political uncertainly + volatility) of macro conditions foreigners and the local public should ideally not touch stocks with a yard pole.
Everybody is looking to sell
Large supplies of stocks are currently held at high prices and as a result any move to the upside will cause heavy selling, crushing the hopes and dreams of the minor bull move. Don’t be fooled about the minor rallies, they are there to help lose your pants in the market.
Dodgy Deals
The TFC deal is a perfect example of how directors and owners of companies are desperately trying to get into cash. These types of agreements are famous in most bear markets.
Entering the 3rd phase of the BEAR market
Phase 1: Prices decline for no reason
The first leg starts when prices start to fall for no apparent reason. The economy looks rosy, the future growth potential of corporations look strong, the experts along with the general public feel optimistic and there doesn’t seem to be anything to worry about. However "smart money" starts to leave the markets and investors start to suffer losses in their portfolios refusing to believe that there is a paradigm shift taking place and continue to hold/add onto their losses.
Phase 2: Macro conditions deteriorate
During the second phase of the bear market investors go broke and start to panic sell, suddenly the economy looks gloomy and there are various macro factors that continue to pile drive prices lower. This is the time that equity analysts start to get bearish as they are historically considered lagging indicators. During this period usually there is some activity from fund managers seeking long term value. Corporate profits are still strong and therefore there can be a short term bull market run, as new and old money finds its way into the market.
Phase 3: Corporate earnings fall.
During the third leg corporations finally start to shed profits and earnings and there can be certain companies that go bust. Most of them suffer from a state of illiquidity and a lack of credit in the system. The macro issues are now priced into the markets and the government and central bank come to the rescue.
The local equity markets seem to be in-between phase 2 and 3. There are macro issues which are troubling however, corporate results are still strong. We expect stellar performances in certain sectors such as hospitality in Q1 and possibly Q2, however there is a concern over the banking sector earnings due to net interest margins shrinking and loan growth caps. This may have ripple effects on the broader economy as higher interest rates may slow private sector growth.
The Banking sector consolidating for a move to the downside
I have been watching the consolidation in the banking sector over the last few months to gauge the direction of the general market and it seems like the market wants to break lower. As depicted in the chart below, the banking sector is expected to deteriorate another 20% – 25% towards its 61.8% Fibonacci level, which will drag down the economy and the market.
Before Sri Lanka experienced its boom and now bust so did our regional counterparts. Based on history the Sri Lankan market should
* Drop at least another 20% to 30% which will be close to the average loss of the regional markets (- 76%)
* The currency should devalue another 10% - 15%
* Interest rates could stay flat or rise slightly
To date Bangladesh is still down 43 % from its peak (Chart D) and Vietnam has gained 25% from its crash after losing all of its gains in the bust phase (Chart C). Surprisingly Pakistan is the only country that has recovered from its bust (Chart E). Sri Lankan investors would be hopeful for a similar result. However, we are only in the middle of the bear market and we have a long way to go. Unfortunately the Sri Lankan economy closely resembles Vietnam and we could be in for a rude reality check.
Summary
Understanding the stock market, the economy, dissecting corporate earnings can all be complicated and hard to fathom. History therefore provides an insight into the markets which ignores the noise and confusion along the way.
The movements in the Sri Lankan market and the economy are nothing new to global markets. Investors should not assume that the Sri Lankan markets are special and witnessing extreme circumstances. History will show you that nothing has changed over the hundreds of years because humans have not changed.
Investing is a volatile game. Trust no one but the market. Try and understand her, where she is coming from, what she feels and what she has done in the past in order to understand what she plans to do next.
Profile: MarketsNeverLie
MarketsNeverLie is a pen name for a global investment specialist who has technical experience in global markets ranging from commodities, currencies and equities. The author has worked for a major global bank and runs his own trading operation in Singapore. The author’s thoughts, comments and trade ideas on global investments can be found on Twitter and Stocktwits under his pen name MarketsNeverLie. The author encourages investors to tweet him for specific advice regarding their investments.
http://www.island.lk/index.php?page_cat=article-details&page=article-details&code_title=51838
A bear market can be catastrophic for any economy, especially an emerging one which does not understand the ramifications of such conditions. A bear market can bankrupt an innocent small investor who bought Soft logic (SHL) shares at LKR 29 on leverage and now is paying interest which he cannot afford on a stock that currently trades at LKR 10 and is expected to go down to LKR 8.
A bear market can slap and spit at the face of a supposedly healthy company that is generating strong revenues such as Peoples leasing (PLC) which was heavily promoted at LKR 18 and currently trades at LKR 11 and has a target price of LKR 9 on it.
A bear market can disgrace and ridicule a central banker who promises 8.5% growth over the next decade, the sun and moon full of foreign direct investment (FDI) pouring into Sri Lanka and boast about a stable economic environment.
A bear market can crush a country’s currency, play havoc with inflation and abuse the macro economic landscape of a country. Yes, a bear market can be quite detrimental to an economy but the worst thing about a bear market is the fact that no one wants to accept her faith, understand her reasons and learn from her mistakes which have ripple effects that can last for years.
Sadly all the salesmen in the country only continue to feed the public a spoon full of sugar so that the bitter medicine can go down.
WAKE UP SRI LANKA!
MarketsNeverLie 1 year forecasts (probability 70%)
* All Share Price Index to head towards 4,000
* The Rupee to head towards 140-150
* 3 month interest rates to move towards 14% and the yield curve to flatten
8 reasons behind my forecast
Technical view
I expect the All Share Price Index (Chart A) to come down to 4,000 which is the markets 61.8% Fibonacci level. Historically during bust phases markets usually head towards these levels. It is difficult to forecast the intermediary swings within this range but the end result has a 70% probability.
Rising interest rates
We are currently seeing a rising interest rate cycle and historically these cycles can last for 1 or 2 years. The rates have currently increased 40% YTD, however technically I see the 3 month yield increasing another 100 to 200 basis points towards 14%. Simply a rising interest rate environment causes stocks and bonds to fall.
Beware of central bank and government forecasts
Even though the central bank continually talk about large sums of foreign direct investment (FDI) and other window dressing statements, realistically we should question it with a bowl of salt.
We cannot keep relying on the IMF or China for money, this makes me question the stability of the currency and we could see the currency move towards 140 - 150 in the coming year. Given the VOLATICS (Political uncertainly + volatility) of macro conditions foreigners and the local public should ideally not touch stocks with a yard pole.
Everybody is looking to sell
Large supplies of stocks are currently held at high prices and as a result any move to the upside will cause heavy selling, crushing the hopes and dreams of the minor bull move. Don’t be fooled about the minor rallies, they are there to help lose your pants in the market.
Dodgy Deals
The TFC deal is a perfect example of how directors and owners of companies are desperately trying to get into cash. These types of agreements are famous in most bear markets.
Entering the 3rd phase of the BEAR market
Phase 1: Prices decline for no reason
The first leg starts when prices start to fall for no apparent reason. The economy looks rosy, the future growth potential of corporations look strong, the experts along with the general public feel optimistic and there doesn’t seem to be anything to worry about. However "smart money" starts to leave the markets and investors start to suffer losses in their portfolios refusing to believe that there is a paradigm shift taking place and continue to hold/add onto their losses.
Phase 2: Macro conditions deteriorate
During the second phase of the bear market investors go broke and start to panic sell, suddenly the economy looks gloomy and there are various macro factors that continue to pile drive prices lower. This is the time that equity analysts start to get bearish as they are historically considered lagging indicators. During this period usually there is some activity from fund managers seeking long term value. Corporate profits are still strong and therefore there can be a short term bull market run, as new and old money finds its way into the market.
Phase 3: Corporate earnings fall.
During the third leg corporations finally start to shed profits and earnings and there can be certain companies that go bust. Most of them suffer from a state of illiquidity and a lack of credit in the system. The macro issues are now priced into the markets and the government and central bank come to the rescue.
The local equity markets seem to be in-between phase 2 and 3. There are macro issues which are troubling however, corporate results are still strong. We expect stellar performances in certain sectors such as hospitality in Q1 and possibly Q2, however there is a concern over the banking sector earnings due to net interest margins shrinking and loan growth caps. This may have ripple effects on the broader economy as higher interest rates may slow private sector growth.
The Banking sector consolidating for a move to the downside
I have been watching the consolidation in the banking sector over the last few months to gauge the direction of the general market and it seems like the market wants to break lower. As depicted in the chart below, the banking sector is expected to deteriorate another 20% – 25% towards its 61.8% Fibonacci level, which will drag down the economy and the market.
Before Sri Lanka experienced its boom and now bust so did our regional counterparts. Based on history the Sri Lankan market should
* Drop at least another 20% to 30% which will be close to the average loss of the regional markets (- 76%)
* The currency should devalue another 10% - 15%
* Interest rates could stay flat or rise slightly
To date Bangladesh is still down 43 % from its peak (Chart D) and Vietnam has gained 25% from its crash after losing all of its gains in the bust phase (Chart C). Surprisingly Pakistan is the only country that has recovered from its bust (Chart E). Sri Lankan investors would be hopeful for a similar result. However, we are only in the middle of the bear market and we have a long way to go. Unfortunately the Sri Lankan economy closely resembles Vietnam and we could be in for a rude reality check.
Summary
Understanding the stock market, the economy, dissecting corporate earnings can all be complicated and hard to fathom. History therefore provides an insight into the markets which ignores the noise and confusion along the way.
The movements in the Sri Lankan market and the economy are nothing new to global markets. Investors should not assume that the Sri Lankan markets are special and witnessing extreme circumstances. History will show you that nothing has changed over the hundreds of years because humans have not changed.
Investing is a volatile game. Trust no one but the market. Try and understand her, where she is coming from, what she feels and what she has done in the past in order to understand what she plans to do next.
Profile: MarketsNeverLie
MarketsNeverLie is a pen name for a global investment specialist who has technical experience in global markets ranging from commodities, currencies and equities. The author has worked for a major global bank and runs his own trading operation in Singapore. The author’s thoughts, comments and trade ideas on global investments can be found on Twitter and Stocktwits under his pen name MarketsNeverLie. The author encourages investors to tweet him for specific advice regarding their investments.
http://www.island.lk/index.php?page_cat=article-details&page=article-details&code_title=51838
