Selling pressure on selected stocks – particularly the banking counters – pushed indices further into negative territory with the benchmark ASPI hitting a 20-week low on Friday as shares in the Banking & Finance sector declined amidst paltry volumes, Acuity Stockbrokers said in its Share Market weekly.
"Selling pressure on banking shares was primarily led by concerns surrounding the Budget 2016 proposal of a corporate tax rate increase of 30% (against 28% earlier) which coupled with increases in NBT and VAT pushes the effective tax rate of banks 5.5% higher than the current tax rate," the report said.
Average market turnover hovered around LKR 0.70 bn, as both retail and institutional investor activity failed to pick up pace. Off-board transactions – which on average contribute about 33%-35% to total turnover – dropped to 22% of turnover last week, it noted.
"A sharp spike in foreign selling added to the overall gloomy sentiment, as a 68.07% W-o-W increase in average foreign sales reversed last week’s net buying position," Acuity said.
This pushed up the Y-T-D net outflow position to LKR 4.65 bn from LKR 4.54 bn as at Oct 2015, extending this year’s monthly net outflows for the fifth consecutive month.
Acuity expected markets in the week ahead as likely to retain the current pattern.
John Keells Stock Brokers said the ASPI ended 0.80% lower for the week amid subdued turnover levels. Activity centered around the banking, finance , insurance, and diverisified sectors accounted for a majority of turnover.
"Active foreign participation amounted to 44% of the week’s turnover resulting in a net outflow of Rs.211mn., JKSB said.
In a review of the budget, Acuity said that enhancing revenue and laying the foundation for the country’s medium-term policy framework appear to be focal points in Budget 2016.
"Proposals to improve revenue address a key structural weakness in Sri Lanka’s public finances; the comprehensive policy prescriptions to augment the country’s knowledge base meanwhile, are aimed at realigning the country as an export-based economy," the review said.
"Despite the broadly positive sentiment surrounding Budget 2016, the question of how soon and effectively implementation takes place remains. We thus foresee the 2016E deficit target being overshot yet again.
"In terms of financing meanwhile, the weaker LKR and prospects of higher global interest rates imply that the 2016 revenue shortfall will be primarily funded via domestic sources. This is likely to place further upside pressure on domestic interest rates and we retain our estimates of a 25-50 bps increase in policy rates in the first half of 2016.
"Despite the prospect of higher interest rates though, capital markets (particularly equities) are likely to receive a significant boost from the development initiatives proposed," the review said.
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