Sri Lanka 06-month Treasury yield falls to 8.24-pct

ECONOMYNEXT – Sri Lanka’s six-month Treasury Bill yield fell 06 basis points to 8.24% at an auction Wednesday from 8.30% at the last auction, the central bank’s public debt department said.

One year bill yield remained at 8.90% while the 03-month bill was not offered, a statement said.

The public debt department got bids worth Rs57 billion and accepted bids of Rs23.5 billion, the exact amount offered.

Sri Lankan shares rise on banks, diversified stocks

Reuters: Sri Lankan shares rose for an eighth straight session to hit a six-week closing high on Wednesday, as investors picked up banks and diversified shares, with sentiment expected to remain positive after the central bank kept key policy rates unchanged last week.

The Colombo Stock Index ended 0.81 percent firmer at 6,463.50, its highest closing level since Nov. 22.

Shares in conglomerate John Keells Holdings Plc gained 3.7 percent, while Lanka ORIX leasing Company Plc rose 4.8 percent.

“The positive trend which started last few days of 2017 is continuing, with investors continuing to buy value stocks,” said Dimantha Mathew, head of research at First Capital Holdings.

“Declining market interest rates is a big positive factor.”

Turnover stood at 638.3 million rupees ($4.15 million), less than last year’s daily average of 915.3 million rupees.

Foreign investors net bought shares worth 190.95 million rupees on Wednesday. Foreign investors net bought 18.5 billion rupees worth equities in 2017, and 633.5 million rupees worth of stocks in 2016.

The index has risen 2.26 percent in 2017, posting the first annual increase in three years, after falling 9.7 percent in 2016.

Since March 2017, treasury bill rates have fallen between 188 and 216 basis points though end-December, mainly driven by foreign investors buying treasury bonds, resulting in declining market interest rates.

Analysts also said the 2018 economic growth trajectory would help boost market sentiment.

Sri Lanka’s economic growth in 2018 is forecast at 5-5.5 percent, bouncing back from an anticipated four-year low of less than 4 percent last year, central bank Governor Indrajit Coomaraswamy said on Wednesday. 

($1 = 153.7000 Sri Lankan rupees) 

(Reporting by Ranga Sirilal and Shihar Aneez; Editing by Biju Dwarakanath)

Capital market wish list for the New Year

By Duruthu Edirimuni Chandrasekara

Yet again we are in the dawn of another New Year. The Sri Lankan capital market’s wish list for Santa is long. So what’s in store for us?

The good news is that the new Santa, the Finance Minister Mangala Samaraweera has pointed out the importance of building a vibrant capital market to provide lower cost funding to the economic activity of the country in the 2018 Budget. For this purpose, it has been proposed that the two state banks, Bank of Ceylon and People’s Bank, evaluate options of tapping international capital markets without diluting the controlling ownership of the Government as done by state banks in several countries, including India and China. This is the number one wish for next year.

The Securities and Exchange Commission Bill will replace the Securities and Exchange Commission of Sri Lanka (SEC) Act, No. 36 of 1987, and it is expected to be presented in Parliament on January 24. “The previous Act is 30-years old, weak and is limited in its scope over listed securities and few market intermediaries. The SEC could take action against wrongdoers only through criminal proceedings and has not changed with the times compared to the rest of the world. If the new bill is passed it will lead to major reforms in the capital market,” Ravi Abeysuriya, immediate past president – Colombo Stock Brokers Association told the Business Times.

It is aimed at regulating market institutions, public offers of securities, market intermediaries, deal with market misconduct, and create a fair, efficient and transparent securities market in keeping with international standards.

“The bill will facilitate the establishment and regulation of demutualised exchanges, clearing house, central depository, issue and trading of listed and unlisted securities, protection of client’s assets, etc and also provides for directors and chief executive officer of a listed public company to comply with the fit and proper criteria,” Mr. Abeysuriya added.

In this law, auditors of listed public companies are expected to report any issue that “may adversely affect the financial position of the listed public company to a material extent” immediately to the audit committee “and if no remedial measure is taken within two weeks thereof refer the matter to the board of directors”.

Market sentiment

This year recorded an all-time high foreign investor interest with a net foreign inflow of Rs. 17.7 billion as of Boxing Day this year compared to a net foreign outflow of about Rs.2 billion for same period last year.

Mr. Abeysuriya added that the Sri Lanka market continues to trade at a discount compared to the regional peers and offers a great opportunity for investors — with a market P/E that is at 10.6 compared to say Vietnam 18.5 and Bangladesh 23 and a majority of listed companies trading below book value Sri Lanka is attractively priced.

“Attractive market valuation, encouraging performance among listed entities, dividend payments and capital gains tax exemptions offered to share transactions and low depreciation of the rupee are some of the reasons for the foreign interest.”


Work at the Cinnamon Life project which will create a buzz in the stock market once completed. Pic by Indika Handuwala

But the same cannot be said about the local investor sentiment. “We have not yet seen local institutional, high net worth and retail investor interest in the market. EPF, ETF, NSB, SLIC not active due to ongoing investigations,” he added.

Mr. Abeysuriya added that what needs to change from tomorrow is the smaller size and lower liquidity in the local equity market. “Solving this ‘size and liquidity’ issues is imperative to unlock the potential of the Sri Lanka capital market and requires very bold and visionary supply and demand side reforms by the Government.”

Sri Lanka could easily attract a significant amount of foreign funds and increase the depth and breadth of CSE if Sri Lanka is included in the MSCI Emerging market Index, which is tracked by investors managing US$9.5 trillion of assets. When Sri Lanka is in the index, MSCI Emerging Market Index tracker funds will be required to invest in Sri Lanka as they need to replicate the index.

For Sri Lanka to be included in the MSCI Emerging Market Index, it must have, among other requirements, at least three firms with a full market capitalisation of $1 billion and $516 million of listed stock. So the mantra should be to list SOEs. “Listed SOEs will be able to raise more funds by way of both additional equity and debt offerings to the public and further reduce the budgetary burden of the Government,” Mr. Abeysuriya added.

The efficiency at which the institutions in the financial system mobilise savings, allocate funds to finance productive investments, monitor the operations of the entities and transform risk will largely govern the economic performance of Sri Lanka. Mr. Abeysuriya stressed that there’s an urgent need to establish a Financial Sector Oversight Committee (FSOC) to coordinate and implement financial sector reforms in Sri Lanka to deliver what has been promised in the Government’s Economic Policy Statement – Vision 2025.

“The objective of FSOC should be to fast-track the implementation of financial sector reforms by inter-regulatory coordination with the key stakeholders including the Ministry of National Policies and Economic Affairs (MoNPaEA), Ministry of Finance, Ministry of Public Enterprise Development, SEC, Insurance Board, Colombo Stock Exchange (CSE) and the Central Bank by submitting proposals to the Cabinet Committee on Economic Affairs for approval through MoNPaEA. To assist the FSOC in the implementation, a ministry-level Central Project Coordination Unit (CPCU) should be formed which will be housed at MoNPaEA,” he said.

The stock broking industry is facing a precarious financial situation today with dwindling turnover, mounting costs and heavy losses, with little or no hope of a turnaround. Stock broking companies are facing a multitude of financial problems, which may not only undermine the orderly workings of the industry but also the sustainability of the stock brokerage industry. The issuance of seven new stock broker licenses since 2010, in addition to the six trading member licenses issued previously, further exacerbated the industry situation.

To address this situation, the SEC needs to offer a package of incentives to promote amalgamation and consolidation among stock broking companies in keeping with industry consolidation incentives offered by countries such as Malaysia and India, according to Mr. Abeysuriya. “In order to revitalise the market activity, brokerage companies that satisfy good governance standards and fit and proper criteria of directors as per SEC should be allowed to adopt the universal brokerage model and allowed to offer discount brokerage for on-line only transactions using funded accounts i.e. direct debit of client’s bank or Money Market account.”

The SEC should allocate a portion of the Cess fund for the Colombo Stock Brokers Association to promote the securities and investment industry and the establishment of a sound industry structure, promote education and training in all aspects of the securities and investment industry so as to upgrade the expertise and professionalism of members and to implement a self-regulatory mechanism, institute by-laws and regulations for members in accordance with constitution and take such action as may be necessary to enforce member discipline, similar to industry associations of countries such as Australia and Singapore, he added.

Interest rates down

Next year will see banking interest rates adjust downwards in 1H2018 similar to 4Q2017 to be in line with the dip in yields of Government Securities which is generally a positive sign for equity market as investors may look at alternative investment opportunities for bank FDs, analysts say.

“As long as bank FDs remain at or above 13 per cent-15 per cent is likely to be considered an attractive safe return for most investors diverting funds into fixed income instruments which were the cast throughout 2017,” Dimantha Mathew Head of Research First Capital Holdings PLC said.

He added that with the dip in government securities yields bank interest rates would follow a similar course supported by the expected reduction in the ceiling of the interest rates on FDs for finance companies by December 31. “Ceiling rates for one year which is currently at 13.55per cent is expected to come down by at least 130-140 basis points to about 12.2 per cent. These rates is primarily for finance companies and bank interest rates we believe are likely to trickle down and hover around 10-11 per cent during 1H2018 and be maintained around the same level during 2H2018 as well.”

With equity markets having higher risk premium which is around 8 per cent to the risk free rate, it currently provides an expected return of around 16 per cent-17 per cent down from around 20 per cent-21 per cent about six months ago, he added.

“However, the current tight monetary policy has slowed down the economy significantly reducing earnings growth for most companies. This situation is expected to ease off towards 2H2018. Therefore it is likely to have slightly better earnings performance in 2018/19 compared to the weak performance we are currently seeing in 2017/18. We believe overall market earnings are likely to grow by a modest 5 per cent-7 per cent during 2018/19 supported by a recovery in economic performance in the 2H2018. This is likely to accelerate to 10 to 12 per cent towards 2019/20 backed by further improvement in economic health of the country and also easing of the monetary policy with more stability in the system.”

Market returns are likely to be slow but stay positive in the 1H2018 due to attractive valuations prevailing in the economy and is likely to improve in the 2H2018 supported by expectations of a better economic outlook and earnings performance, analysts say. “We expect overall market returns are likely to be 10 to 12 per cent above the expected earnings performance with some re-rating with an expected better earnings outlook in the future. In terms of the ASPI index it is only likely to reach 7000 (+650 points) towards end of 2018. Market returns are likely to accelerate towards 2019 to about 15 per cent with the actual earnings performance and renewed investor confidence. Index is likely reach 8000 level (+1000 points) towards 2019. These targets however are highly dependent on the current stable outlook and reform agenda continuing during 2018 as well,” Mr. Mathews added.

Analysts say that the key sectors that are likely to outperform the market and expected provide high returns are the banking sector, building materials sector and apparel sector while the energy sector also may turnaround depending on the implementation of the pricing formulas.

www.sundaytimes.lk

Sri Lanka stocks marginally up, bonds soar as yields fall in 2017

ECONOMYNEXT - Sri Lanka's stocks lagged the performance of bond markets in 2017, with the Colombo All Share Index up 2.2 percent while bond prices rose with the 10 year yield plunging over 200 basis points amid fiscal and monetary tightening.

The Colombo All Share Index rose ended in December at 6,228.28 points while the S&P Index of more liquid stocks rose gained 5 percent to end the year at 3,871.72 points.

The market price earnings ratio fell to 10.6 by end December 2017 on published results from 12.4 in 2016, indicating that stocks are broadly cheaper, though individual companies have made gains.

The price to book value fell to 1.31 by year end from 1.4 in 2016.

The market dividend yield rose to 3.19 percent from 2.8 percent, indicating that firms were paying higher volumes of dividends at current prices.

On the macro-economic front monetary tightening in 2016 had slowed private credit and ended central bank money printing, ending a balance of payments crisis triggered by a disastrous 2015 budget which was accommodated by rate cuts and liquidity releases by the central bank.

Fiscal tightening with higher value added taxes in 2017 and a wage freeze for two years after a steep hike in 2015 have brought state finances back to square one.

However high yield bond sold at longer tenures in 2015 and 2016 amid much controversy will continue to be a drag on the budgets for years to come. A private firm will try to borrow short when rates spike.



Bond yield fell sharply over 2017 though with private credit slowing, and inflation high with the central bank continuing to depreciate the currency, targeting a real effective exchange rate index, the effects are still not felt on companies.

Sri Lanka ended 2017 with inflation of 7.1 percent, overshooting the mid-single digit inflation target of the central bank. Historical inflation is now almost on par with current short term rates but the central bank has said inflation will ease in the first quarter.

The three month Treasury boll yield fell 1.02 basis points from 8.80 percent to 7.78 percent in the secondary market on average according to central bank data, while the 12-month yield fell 1.29 basis points to 8.99 percent.

A 2-year bond maturing on 15 November 2018 was quoted at a yield of 11.56 percent in the last week of December 2016 (94.12 rupees0. A 01 November 2019 bond was quoted at a buying yield of 9.31 percent in late December according to central bank data (97.49 rupees) indicating a fall of 205 basis points.

The 15 November 2018 bond, now 11 months to maturity was quoted at 99.16 rupee up 3.04.

The 5-year yield fell from 12.20 percent (90.22 rupees) for a 15 October 2021 bond in 2016 to 9.85 percent (100.02) for a 01 Oct 2022 bond in 2017, plunging 235 basis points.

The holder of 15 October 2021 could sell the bond at 98.75 rupees, up 8.53 rupees. The 10-year yield fell from 12.37 percent (94.13 rupees) measured by a 01 August 2026 bond in 2016 to 10.23 percent for a 15 December 2027 bond (100.29 rupees), showing a fall of 2.34 percent.

A holder of a 01 August 2016 bond could have sold it at 106.29 rupees according to central bank data up 10.23 rupees.

The central bank expects market rates to translate to lending rates, but it has not cut policy rates. Unlike in some earlier crisis where there was a fast recovery such as in 2001 and 2009, the central bank has not allowed the exchange rate to appreciate.

ASPI, S&P SL 20 index close year in positive territory

Indices recorded a turnaround during the year to end in positive territory. The ASPI gained 2.26% while the S&P SL 20 gained 5.01%.

The Colombo bourse enters 2018 at the back of a turnaround year in 2017, where the country experienced improvements in many fronts with relation to the performance of the market.

Both the All Share Price Index and the S&P SL 20 index closed the year in positive territory after a lapse of two years and saw an improvement in trading activity. 2017 also brought about a record breaking year for foreign investment and for capital raising through rights issues.

While the market is encouraged by this performance, the CSE together with its stakeholders will continue with initiatives to develop the market in key areas of strategic importance, including in market development, product diversification, governance, and market infrastructure and risk management, said Rajeeva Bandaranaike CEO of Colombo Stock Exchange.

The extensive awareness drive, which saw capital market promotions in key foreign markets and in key towns around the country which was conducted in association with the SEC in 2017 will continue this year as well.

The Stock Exchange will also see a number of new listings in the coming year, some of which would be through new avenues.

“We aspire to open the local market for foreign listings this year, at a time when business operations and capital flows are becoming increasingly globalized, and as Sri Lanka aspires to develop into a new center of economic strength and innovation. More emerging and growing businesses, especially across Asia today are considering the pros and cons of accessing public capital in a foreign market and are looking beyond their mature domestic markets.”

“This we believe, presents the CSE with an opportunity to attract such businesses to list in Sri Lanka.

We will also introduce a dedicated listing platform for our local SMEs - the core of the Sri Lankan economy. SMEs will therefore commencing this year, have the opportunity to raise capital and benefit from the Sri Lankan stock market and investors will have the opportunity to participate in this exciting and dynamic sector of the economy. “e expect to make other key development related and stakeholder focused announcements as the year progresses.”www.dailynews.lk

Vidullanka commissions hydro power plant

Vidullanka PLC, in a stock exchange filing yesterday, said that it has successfully completed the construction of the 1.40MW Udawela Mini Hydro Power Plant in Soranathota, Badulla and the plant was commissioned to the national grid on December 29.

Udawela is the 11th power project commissioned by Vidullanka PLC.

The Udawela Mini Hydro Power Plant is owned by Udawela Hydro (Pvt) Limited which is a wholly owned subsidiary of Vidullanka PLC.

www.dailynews.lk

Fitch rates SLT’s debenture ‘AAA(lka) (EXP)’

Fitch Ratings has assigned Sri Lanka Telecom PLC’s (SLT, AAA(lka)/Stable) proposed senior unsecured debenture issue of up to Rs 7 billion an expected National Long-Term Rating of ‘AAA(lka)(EXP)’.

The debentures will have a tenor of 10 years and carry fixed coupons.The debentures will be listed on the Colombo Stock Exchange, with the proceeds to be used to refinance its short-term debt and fund SLT’s capex plans.

SLT’s senior unsecured debt is rated at the same level as its National Long-Term Rating, as the debentures rank equally with other senior unsecured obligations.

The final rating is subject to the receipt of final documents conforming to information already received.

www.dailynews.lk

CBSL to manage ETI Finance and Swarnamahal FS

The Monetary Board of the Central Bank of Sri Lanka at its meeting held on January 1, having considered the weak financial performances of the ETI Finance Ltd. (ETIF) and Swarnamahal Financial Services PLC (SFSP) decided to take regulatory actions, as a temporary measure, under the provisions of the Finance Business Act No. 42 of 2011, with immediate effect.

This with a view to safeguard the interests of the depositors and other creditors of the two companies, and to ensure safety and soundness of the financial system.

These include the appointing a panel to manage the affairs of both companies restrict the withdrawal of maturing deposits and renew such deposits for a period of six months and thirdly the payment of interest due for deposits as per agreed terms and conditions.

In the meantime, the companies can finalize the negotiations with the prospective investors and the Central Bank will facilitate suitable investors as per the applicable laws and regulations.

The depositors of the above two companies are further informed that the Central Bank is taking further measures and closely monitoring the operations of the companies to protect the rights of the depositors and therefore, the depositors are kindly requested to cooperate with the Central Bank in its effort to ensure the stability of the ETIF and SFSP.

The depositors may contact the Department of Supervision on Non-Bank Financial Institutions of the Central Bank through the telephone numbers 011 2477258 or 011 2477229, for further clarification.

www.dailynews.lk