Foreign confidence in economy appears to be improving: First Capital Equities

Market started the trading for a fresh week on Monday and ended negatively as notable losses were recorded in both market indices. ASI declined by 67.38 points (-1.19%) and S&P SL 20 Index declined by 45.07 points (-1.42%). Market turnover was LKR 324mn. John Keells Holdings was the highest contributor to the market turnover with LKR 148mn followed by Commercial Bank with LKR 32mn and Sampath Bank with LKR 15mn. Meanwhile, Central Investment & Finance, John Keells Holdings and Textured Jersey were the mostly traded stocks for the day. Foreign participation for the day was 28% and foreign investors were net buyers with a net inflow of LKR 107mn.

On Tuesday Stock market regained and closed with positive returns for the first time in month of September ASI gained 62.07 points (1.11%) and the S&P SL20 index gained 18.59 points (0.59%). Turnover was LKR 630mn. Top contributors to turnover were John Keells Holdings with LKR 325mn, Ceylon Guardian Investments with LKR 91mn and Commercial Bank with LKR 37mn. Most active counters for the day were Central Investment and Finance, PC House and Environmental Resources Investments. Foreign participation was 37% of total market turnover whilst net foreign selling was LKR 287mn.

Colombo Stock market indices advanced further on Wednesday increasing the market cap by LKR 26bn (+1.1%). 14 day Relative Strength Index on ASI passed the oversold threshold of 30 to 37. Broad market index advanced by 62.88 points (1.11%) and S&P SL 20 Index gained 28.27 points (0.90%). Daily market turnover reached LKR 1.2bn, which was the highest recorded after five week period. John Keells Holdings which was among the heavily traded stocks emerged as the largest contributor to the market turnover with LKR 846mn. Further, Sampath Bank and Commercial Bank recorded the next top turnover levels of LKR 123mn and LKR 35mn respectively. Further heavy retail participation was seen in HVA Foods, E-Channelling and Blue Diamond non-voting. Foreign participation was 43% whilst recording a net inflow of LKR 712mn.

On Thursday market closed with positive returns as ASI improved by 14.29 points (0.25%) and S&P SL 20 Index increased marginally by 5.94 points (0.19%). Daily turnover was LKR 387mn which is 56% below the year-to-date average turnover of LKR 883mn. John Keells Holdings recorded the top turnover of LKR 116mn followed by Sampath Bank (LKR 66mn) and Ceylon Cold Stores (LKR 21mn). Meanwhile Blue Diamond (voting and non-voting shares), Swarnamahal Financial Services and HVA Foods were the mostly exchanged stocks during the day. Foreign participation for the day was 41% whilst recording a net inflow of LKR 80mn.

Penny stocks rally was witnessed during Friday trading session in Colombo Stock Exchange where most of such stock prices closed with notable gains purely due to the demand & supply. Troubled Touchwood Investment and Central Finance & Investment were the top gainers with heavy trading where the prices are appreciated by 46% and 25% respectively.

Market indices closed with mixed results. ASI increased marginally by 4.96 points (0.09%) to end at 5,749.49 and S&P SL 20 Index declined by 8.16 points (-0.26%) to end at 3,176.74. Market turnover reached LKR 980mn with the support of negotiated transactions took place in John Keells Holdings (~2.7mn shares at LKR 209-210.) which accounted for 58% of the total turnover. Accordingly JKH emerged as the highest contributor to the daily turnover with LKR 645mn followed by Sampath Bank with LKR 70mn and Chevron Lubricants by LKR 35mn.

Further, Blue Diamond (voting and non-voting shares), PC House and PCH Holdings were among the mostly traded stocks for the day.

During the week ASI advanced by 1.4% and resumed to the positive year-to-date yield. World stock market indices also advanced during the week (S&P- USA by 2%, FTSE – UK by 1%, Nikkei – Japan by 3%, Shanghai – China by 6%, BSE Sensex – India by 4%, KSE – Pakistan by 3%) after Syria accepted a Russian proposal to give up chemical weapons and win a reprieve from US strikes on Tuesday. Further Gold spot prices fell by 6% on uncertainties over the timing and pace of US monetary stimulus. Goldman Sachs said that there’s a risk that bullion may drop below USD 1,000 an ounce. However Gold futures haven’t traded below USD 1,000 since October 2009.

Colombo bourse which gathered momentum towards mid-week ended the week with mixed reactions, where the S&P 20 index remained virtually flat. The ASI gained 76.8points WoW to close at 5,749.5 points (+1.4%), whilst the S&P SL20 Index lost a mere 0.4 points WoW to close flat at 3,176.7 points (-0.0%). Benchmark index edged up mainly on the back of gains made by Ceylon Tobacco Company (+2.8% WoW), Carson Cumberbatch (+5.9% WoW), Sri Lanka Telecom (+4.4% WoW), Commercial Leasing and Finance (+11.4% WoW) and Ceylinco Insurance (+10.0% WoW).

The Colombo Bourse initiated the week on a bear run dragging down the YTD return to a negative 0.7%, whilst it picked up gradually towards mid-week to end on a positive note. Despite the benchmark index gaining four days consecutively, it still remained well below its psychological 6,000 mark. Meanwhile, market activities accelerated during this week, backed by institutional and high net worth interest mainly focused on selected blue-chip counters. Further market witnessed renewed foreign interest, as they became net buyers during the week, bringing the YTD net foreign inflow nearing to LKR c.20.0bn. John Keells Holdings, Lion Brewery, Sampath Bank etc were believed to be gathering foreign interest throughout the week.

John Keells Holdings emerged as the top contributory counter towards the week’s turnover with a turnover exceeding LKR 2.0bn contributing 60% to the week’s turnover tally. Few crossings along with several block deals on the normal board drove up the counter’s turnover. In addition, few crossings on Sampath Bank and Ceylon Guardian Investments together with few block deals witnessed on Commercial Bank on the normal board also gave a boost to the daily activities.

Trading suspended,Touchwood Investments which was under investigations by the SEC of Sri Lanka, commenced trading on Friday, and witnessed over 9.1mn shares being traded to end the week at LKR 1.90 with a price gain of c.46.2%. In addition, troubled finance company Central Investments and Finance was amongst the highest traded counters during the week with a cumulative share volume of over 15.3mn.The company according to the press is logged with 44 court cases by the fraud bureau. Moreover, retail investor participation was also predominately focused on small cap counters such as PC House and Voting & Nonvoting shares of Blue Diamonds.

The week saw foreign purchases amounting to LKR 1,867.7 mn whilst foreign sales amounted to LKR 992.2mn. Market capitalisation stood at LKR 2,368.1bn and the YTD performance is 1.9%.

Conclusion:
Large scale transactions boost week’s activities……..
The week opened the floor for trading activities on a negative note; however both the indices gathered momentum from Tuesday amidst the appreciation of LKR, WoW activities and turnover level were relatively high cf. to last week as large scale transactions witnessed on selected index heavy weight counters coupled with relatively high participation of retail investors (primarily focused on few small cap counters) lifted the week’s turnover. The week recorded a net foreign inflow of LKR 874.9mn cf. net foreign outflow witnessed during last week.

2QCY2013 earnings were on a mixed note as the headwind posed by the macro environment including relatively high interest rates, volatility in LKR, inflationary pressure that slowed down consumer demand and sharp increase in energy cost curbed the earnings growth. Nevertheless, OECD indicated on Monday that the growth in major developed countries is gathering momentum. This is an encouraging factor in terms of Sri Lanka’s economic context where country’s major export receipts are dominated by US and the Euro Zone. Therefore, companies who have large exposure to export earnings are likely to benefit in the future, whilst fairly stable LKR movement is also likely to support the corporate earnings. Further, expected downward trend in market interest rates subsequent to the expansionary monetary policies adopted by CBSL is likely to ease companies’ financial burden across the sectors, and is also likely to improve the demand for credit by the private sector and in turn support the overall economic growth. However, we expect the monetary authorities to hold the monetary policy rates at the prevailing rates in September considering the improvement in external trade in July under the current policy rate framework and due to the the local currency facing some downward pressure in the face of weakening currencies of the peer economies and foreign out flow from Sri Lankan government securities. On the back of these developments, we advise investors to take position in counters that are trading at attractive multiples and are likely to outperform the peers.
Source: Asia Wealth management Research

http://research.srilankaequity.com/t827-13-09-2013-weekly-review-asia-wealth-management-co-ltd

http://www.sundayobserver.lk/2013/09/15/fin101.asp

The market made a Rs. 979.8 million turnover on Friday (September 13) with blue chip stocks JKH and Sampath Bank. They contributed the highest and second highest turnovers for the day contributing to 25.5% of total turnover, down by half over the previous day’s turnover where those two stocks contributed to 50% of Thursday’s turnover on a total turnover figure of Rs. 386.7 million.

Friday’s turnover was Rs. 979.8 million, with JKH continuing to be subjected to foreign selling, whilst also being subjected to a mix of foreign buying and selling in return. In the case of Sampath, it was a continuation of foreign buying amidst foreign selling.

Net foreign purchases recorded during the period 1.1.13. to 12.9.13. were Rs. 19.1 billion (US$ 144.45 million*).

The benchmark ASPI held, despite the two stocks which are generally used for market manipulation, Ceylon Tobacco (CTC) and Nestle, having had seen their prices falling at Friday’s trading.
CTC, the market’s highest capitalised stock saw its share price fall by 0.44% over its previous day’s close to Rs. 1,120 on a miserly share volume of 1,837 shares, contributing a measly Rs. 2.1 million to the day’s turnover, while Nestle, on a Rs. 543,000 turnover; saw its share value fall by 0.74% to Rs. 2,000; on a volume as insignificant as 271 shares.

As long as the regulators led by the Securities and Exchange Commission (SEC) fail to bring such miscreants to book, it will be difficult for the market to build investor confidence.

CTC’s exposure to market capitalisation (market cap) as at Friday was 9.44%, while that of Nestle’s was 4.83%. Meanwhile JKH’s (the market’s second largest capitalised stock) exposure to market cap as at Friday was 8.09%. JKH closed Rs. 209.60, down 0.14% over its previous day’s close.

Sampath closed Rs. 176 a share, down 1.18% over its previous. Sampath’s exposure to market cap on Friday was 1.33%.

The bourse closed Friday with the ASPI up 0.09% to 5,749/46 and the recently introduced S&PSL 20 Index down 026% to close the week at3176/74 points.

Thursday’s (September 12) turnover at the Colombo stock market was cut down to a third compared to its previous day’s (Wednesday’s) figure, with JKH and Sampath contributing to 50% of the day’s turnover, on the back of net foreign buying for the second consecutive day.

Turnover made was Rs. 386.7 million, of which JKH’s contribution was Rs. 116.1 million and Sampath’s Rs. 65.7 million. Indices closed flat with the ASPI gaining by 0.25% over its previous day’s close to 5,744/50 points and the S&P SL 20 Index by 0.19% to 3,184.90 points.

Shallowness
The shallowness of the bourse may be gauged by the fact that just two stocks contributed to 50% of the day’s turnover on Thursday, exposing the possibility of how easy it may be to manipulate the market by unscrupulous elements due to the bourse lacking in both breadth and depth.

On the previous day Wednesday, JKH came back strongly, after previously being buffeted by continued foreign fund exits, by emerging as one of the main contributors to the Rs. 712.24 million net foreign inflow (NFI) witnessed on that day, whilst also making up to 2/3rds of the day’s turnover with a figure of Rs. 846.1 million out of a total turnover figure of Rs. 1.2 billion recorded on that day.

Sampath was the other main contributor to foreign inflows on Wednesday, on the back of selling by Sohli Captain and connected parties.

Meanwhile, with the announcement made by JKH of a multi-million US dollar ($) betting and gaming venture that led to the exit of foreign funds over uncertainty about this project, largely led by a doubt in regard to the Government of Sri Lanka’s (GoSL’s) policy credibility.

However, the company was able to somewhat arrest this outflow with a subsequent announcement of an “attractive” rights issue buttressed with warrants. But there was also foreign selling on JKH on Wednesday, though, on a net basis there was a gain, market sources told this reporter.

Nevertheless JKH’s share price remained unchanged at Rs. 209 over its previous day’s close.

But the fact that JKH dominated 2/3rds of Wednesday’s turnover goes to show that the stock market lacks the breadth and the depth to act as a mirror of the country’s economy, and worse still, under such circumstances, it’s also easy to manipulate the bourse.

Meanwhile market indices made significant gains, supported by alleged manipulation in prices of some key stocks.

For instance CTC saw its share price move up by 8.57% over its previous day’s close to Rs. 1,140 on a nominal number of some 682 shares on Wednesday.

As a result the ASPI gained by 1.11% to close the day at 5,730.21 points while the S&P SL 20 Index increased its value by 0.90% to 3,178.96 over its previous day’s close.

Pyrrhic Gains
The bourse at Tuesday’s (September 10) trading virtually recouped the losses it suffered the previous day, but at the cost of making a net foreign outflow (NFO) of Rs. 286.81 million, data showed.

The ASPI gained by 1.11% to 5,667.33 points over its previous day’s close while the S&P SL 20 Index increased by 0.59% to 3,150.69 points, whereas the previous day these indices fell by 1.19% and 1.42% to 5,605.26 and 3,136.44 points respectively.

The cause of much of the turnover, gains and even losses these days is due to foreign funds’ exit from JKH due to uncertainty, probably brought about by policy uncertainty in regard to GoSL’s position on the betting and gaming industry, vis-a-vis JKH’s multi million $ virginal venture in this area, where this conglomerate, despite the announcement of an attractive rights issue, was however been unable to stop the flood of foreign fund exit from its shares, then.

Meanwhile of Monday’s Rs. 323.7 million turnover, JKH accounted for over 45% of this figure, John Keells Stockbrokers in a report said. Then, of the following day Tuesday’s Rs. 629.7 million turnover, JKH contributed over 50% of it with a sum of Rs. 324.8 million.

On Monday, JKH’s share value fell by Rs. 3 (1.4%) over its previous day’s close to Rs. 206/40, while on the following day Tuesday, those shares gained by 1.26% to Rs. 209, probably due to buying by Sohli Captain and family, and related companies, who, cumulatively is JKH’s single largest shareholder.

JKH, being liquid, is also subjected to manipulation, which ipso factor has an impact on market indices, sources told this reporter. But two of the market’s biggest culprits vis-à-vis share price manipulation, i.e. CTC and Nestle, which also has a weightage on market indices, too made gains on low volumes on Tuesday.

CTC, on a low volume of 624 shares saw its share price gain by 1.91% to Rs. 1,050 and Nestle, on a low volume of 462 shares saw its share price gain by 2.48% to Rs. 2,047/50 at Tuesday’s trading.
CTC’s weightage on market cap as at Tuesday was 8.98%, JKH (8.19%) and Nestle (5.02%).

The tragic comedy is that the regulators led by the SEC are doing nothing to bring to book these manipulators. Under the circumstances how may the Colombo Stock Market build investor confidence within and without? – Paneetha Ameresekere

*On the basis that the middle rate of the US dollar ($) in two way quotes as at end of Friday’s trading was Rs. 132/23 to the $ in interbank spot trading.
http://www.thesundayleader.lk/2013/09/15/bourse/

With year-to-date net foreign inflow topping the Rs. 19 billion mark last week with a fresh dose of Rs. 875 million, external confidence in the economy appears to be improving, according to First Capital Equities.
JKH saw net buying of Rs. 617 million whilst Sampath Bank enjoyed Rs. 192 million worth of net buying. Commercial Bank (Rs. 41 million) and Lion Brewery (Rs. 30 million) were other attractions for foreign investors.

First Capital said the Bourse regained and closed with positive returns for the first time in the month of September along with the renewed investor confidence about the economic growth, and the probable positive response from foreign investors who participated at the investor forum held in Hong Kong in the beginning of this week.

“Reaffirming the global confidence in the domestic economy, Sri Lanka’s State-run National Savings Bank has raised US$ 750 m at 8.875% through a five-year US$ 500 m bond. Although the bank initially planned to raise US$ 500 m, the deal attracted orders worth US$ 2.35 b amid jittery international bond markets,” First Capital said.

“Even though there appears to be an apparent disconnection between the global confidence in Sri Lanka and performance of the Bourse, we believe that this gap should narrow once domestic investors realise that the increased oversubscription in Sri Lanka’s bond issues is indicative of the strong foreign confidence in the Sri Lankan economy. Furthermore, it is important to realise that the oversubscription in the country’s bond scripts come at time of heightened global risk and significant liquidity constraints for foreign sovereigns and corporate,” the broking firm added.

Notwithstanding the Bourse’s mild sell off that may have dampened retail sentiment temporarily, First Capital Equities believes that the market now offers a significant investment opportunity and attractive value for those who are willing to look beyond the very short term provided that the right investment strategy is employed over a reasonable investment horizon.

“For those investors who prefer long-term sustainable returns, a bottom-up stock selection approach is advised in order to build a quality portfolio which will generate double digit returns. In order to benefit fully from a flight to quality strategy however, investors may need to be patient, maintain a healthy investment horizon and provide sufficient time for their investments to generate alpha,” it added.

To decide on quality portfolio, although First Capital Equities does not rule out the importance of earnings as a strong indicator of growth, it is highly important to determine the source of profits, whether a result of top line growth or an increase in other income or dramatic cut in costs that could have a negative impact on productivity. Of perhaps even more significance is the sustainability of earnings.

“We advise investors to seek quality, both in terms of the top line and the bottom line, and accentuate the need to select stocks that may not only pass the quality test in terms of fundamentals, but are also sufficiently liquid with healthy bid/offer spreads,” it said.

Softlogic Stockbrokers said the benchmark index last week saw some gains except on Monday leading to 77 point increase on a WoW basis. “We believe the market at this point is likely to consolidate before any run in either direction. We expect buying interest to enter the market at the current level with economy expected to be on a slow, but recovery path,” it said.

“However, though interest rates are unlikely to decline in the short term, the rates have kept steady during the last two months, which is a good sign. With interest rates at current levels we expect there is likely to be higher demand for high dividend yielding counters which may result in a possible capital appreciation as well,” Softlogic Stockbrokers added.

Asia Wealth Management said 2QCY2013 earnings were on a mixed note as the headwind posed by the macro environment including relatively high interest rates, volatility in LKR, inflationary pressure that slowed down consumer demand and sharp increase in energy cost curbed the earnings growth. Nevertheless, OECD indicated on Monday that the growth in major developed countries is gathering momentum. This is an encouraging factor in terms of Sri Lanka’s economic context where country’s major export receipts are dominated by US and the Euro Zone.

“Therefore, companies who have large exposure to export earnings are likely to benefit in the future, whilst fairly stable LKR movement is also likely to support the corporate earnings. Further, expected downward trend in market interest rates subsequent to the expansionary monetary policies adopted by CBSL is likely to ease companies’ financial burden across the sectors, and is also likely to improve the demand for credit by the private sector and in turn support the overall economic growth,” Asia Wealth said.

“However, we expect the monetary authorities to hold the monetary policy rates at the prevailing rates in September considering the improvement in external trade in July under the current policy rate framework and due to the local currency facing some downward pressure in the face of weakening currencies of the peer economies and foreign out flow from Sri Lankan government securities. On the back of these developments, we advise investors to take position in counters that are trading at attractive multiples and are likely to outperform the peers,” Asia Wealth added.
http://www.ft.lk/2013/09/16/foreign-confidence-in-economy-appears-to-be-improving-first-capital-equities/