2014: We are bulls – smart money in equities

By First Capital Equities
Having underperformed against most developed and emerging markets during 2013 with a gain of just 2.3% (in dollar terms), we believe that the ASPI is set to change course during 2014 and poised for a much awaited re-rating.

Our bullish market outlook is due to the following;
Continued softening in domestic interest rates
Twelve T-Bill rates have declined by 285 bps during 2013 and indications are that rates are likely to soften further this year which may result in a shift in funds from the money market to equities. In the Central Bank’s Monetary Policy Review for the month of January 2014, the Central Bank has already indicated that it will reduce the lending rate by 50 bps to 8.0% pointing to further reductions in market rates.

Recovery in corporate EPS growth. With domestic inflation expected to be benign during 2014, we expect operating margins of companies to improve from their 2013 levels. This combined with a reduction in interest costs should result in an expansion in corporate net margins thereby resulting in a recovery in corporate profitability.

Foreign fund flows will provide market momentum
Notwithstanding eurozone debt tensions, most global equity markets rose during the year with foreign funds flowing into both developed and emerging market equities. As shown in the chart, the correlation between the MSCI Emerging Markets Index, the MSCI Asia Apex 50 index and the ASPI remains strong. With emerging market bond funds expected to record outflows this year, we expect liquidity to flow into emerging/frontier market equities. Given the country’s robust fundamentals, Sri Lanka may be a strong beneficiary.

Falling gold prices will provide boost to ASPI
Having declined by 28% during 2013 and as one of the worst performing assets during the year, spot gold is expected to continue decline (albeit moderately) during 2014. Given the inverse co-relation between gold prices and the ASPI during the 2013 as evident in our chart, we believe that any further decline in gold should exert upward pressure on the ASPI.

Reduction in debenture offerings
The significant amount of debentures offered in 2013 mopped up approximately Rs. 72 billion of investible funds that could have otherwise entered the stock market resulting in market turnover levels falling to considerably low levels. Given our expectation of a further softening in interest rates in 2014, the allure of debentures as an ‘investible’ may wan resulting in a flow of funds back into equities.

In economic news, inflation on a YoY basis declined to a two year low of 4.7% in December 2014 compared to 9.2% recorded in the corresponding period of 2012. Consequently the annual average rate of inflation declined for the seventh consecutive month to 6.9% compared to 7.3% recorded in the previous month. A slowdown in the price increase of items in the Non-food category, from 10.0%YoY in 2012 to 6.1%YoY in 2013, contributed to a decline in the annual average inflation rate while relatively high inflation in the food and non-alcoholic beverages category has exerted upward pressure on the CPI.

2014 stock picking guidelines – Back to basics
In order to benefit fully from the bourse’s movements in 2014, we believe that investors may have to revisit the basics of equity investing to derive maximum returns at their accepted level of risk. While most domestic investors were discouraged to enter the bourse last year on the grounds that the market did not deliver, quality stocks listed on the bourse did however generate double digit returns and we believe that they are well likely to replicate their gains in 2014.

Key factors for investors to consider when investing in Sri Lankan equities in 2014 are;

• Defining the risk appetite
• Defining the expected rate of return
• Defining the investment horizon
• Decide on the sector
• Decide on stocks within sector

Market trajectory
While we do contend that the Sri Lanka bourse has not delivered on an YTD basis in 2013 due to a multitude of factors, our 2014 market outlook remains increasingly bullish. However, we advise investors to remain selective and focus on companies with largely monopolistic attributes and strong brand loyalty within sectors and sub-sectors that are both growth and resilient. We re-iterate the need consequently to build a solid portfolio of liquid stocks that have strong top line revenue growth and sustainable margins which we believe are likely to benefit most from the domestic demand story in sectors such as F&B, tourism, manufacturing, diversified, banking and construction. In this respect, we accentuate the need to take a directional call, make an informed investment decision, build a robust portfolio and maintain a strict investment discipline in order to benefit fully from the Bourse’s 2014 upward trajectory.

http://www.ft.lk/2014/01/06/2014-we-are-bulls-smart-money-in-equities/

EPF returns to members could dip

Ceylon FT: Central Bank Governor, Ajith Nivard Cabraal, says the country’s largest superannuation fund could pay its members interest at between 10.8% and 11.3% for 2013, slightly down from 11.5% in 2012.

Central Bank recently claimed that the Employees Provident Fund (EPF) has been providing incomparable good returns to its members over the past few years, despite all the speculations and allegations made by different individuals.

Presenting Road Map 2014, Central Bank Governor, Ajith Nivard Cabraal said, No other fund was able to gain a growth like EPF. The fund has done a lot better than what some of the private sector managers of investment funds were able to achieve.”

The total value of the EPF grew by 12.4% during the first nine months of 2013 mainly due to improved members’ contribution and healthy investment income. EPF’s rate of return to be credited to members for 2013 is likely to be between 10.8% and 11.3%. The total income of the fund grew by 11.9% during the first nine months last year.

At present, the EPF has an active membership of 2.3 million.

The Central Bank said, the EPF will continue to implement diversification strategies to maximize returns in the projected future low interest rate environment. The strategy will include diversification into new instruments, investments in foreign currency denominated instruments and increased participation in secondary market activities.

He went on to say that, with easing monetary conditions, fiscal consolidation and low volatility of inflation, market interest rates are expected to remain low, thereby, providing a challenging environment for the EPF to generate high returns in the medium to long-term.

An electronic data base management system and an e-record room will be set up during the second quarter of this year with electronic records. This will further enhance its services to improve efficiency thereby providing better service to its members and employer firms.

Accordingly, the fund will systematically continue to diversify its investment portfolio in order to provide better returns to its members. The EPF has invested in fundamentally sound stocks in the stock market with a long-term focus. Fund management efficiency will be increased with in-depth analysis of investments, in compliance with the internal rules and improved risk management, he added.

Critics have pointed out that the EPF funds were being used to invest in weak companies listed on the stock exchange and the annual report for 2011 is yet to be made public. (C de S)


http://ceylontoday.lk/22-51975-news-detail-epf-returns-to-members-could-dip.html

MBSL’s stock market index has 10 new inclusions

Ten companies have been included in the 2014 MBSL MIDCAP Index which measures the aggregate price level and price movements of medium size companies listed on the Colombo Stock Exchange (CSE).

They are Asiri Surgical Hospital PLC, Browns Investments PLC, Hemas Holdings PLC, Lanka IOC PLC, Overseas Realty (Ceylon) PLC, Royal Ceramics Lanka PLC, Tokyo Cement Company (Lanka) PLC, Union Bank of Colombo PLC, United Motors Lanka PLC and Watawala Platations PLC The exclusions from the 2013 index are Access Engineering PLC, Browns Beach Hotels PLC, Ceylon Grain Elevators PLC, Colombo Land & Development Company PLC, Environmental Resources Investments PLC, John Keells Hotels PLC, Lanka Orix Finance PLC LB Finance PLC, ODEL PLC and Seylan Bank PLC.

The index, which came into operation in 1999 and is revised annually, looks at the middle range market capitalisation, liquidity and the profitability of the firms to be included in the MBSL MIDCAP Index.

“The MBSL MIDCAP Index will facilitate investors who seek for a return index of medium sized companies listed on the CSE,” according to an MBSL statement which said the index could be used as the benchmark index by individual and institutional investors who prefer growth but are prepared to with stand only conservative levels of volatility in their equity investments.

The other companies in the 25-company index for 2014 are Nations Trust Bank, People’s Leasing & Finance, PABC, Janashakthi Insurance, Central Finance Company, Vallibel One, Expolanka Holdings, Softlogic Holdings, Richard Pieris, Colombo Fort Land & Building, Asiri Hospital Holdings, Lanka Hospital Corporation, Textured Jersey Lanka, Piramal Glass Ceylon and Laugfs Gas.
http://www.sundaytimes.lk/140105/business-times/mbsls-stock-market-index-has-10-new-inclusions-78330.html

Sri Lanka stocks edge up to more than 11-week closing high

COLOMBO, Jan 3 (Reuters) - The Sri Lankan bourse gained for a sixth straight session to close at its highest level in more than 11 weeks on Friday, a day after the central bank cut its lending rate by 50 basis point to a multi-year low. 

The main stock index touched 6,007.79 during the session, a level last seen on Aug. 23 last year, but retreated to end up 0.1 percent, or 5.76 points, at 5,973.80, its highest close since Oct. 17. It gained 1.65 percent on the week. 

"Investors are optimistic over the rate cut and believe retail and large institutional investors will return to the market once banks reduce their lending rates in line with the rate cut," a stockbroker said on condition of anonymity. 

The central bank slashed the standing lending facility rate or reverse repurchase rate by 50 basis points to a multi-year low of 8.00 percent on Thursday, in a move to reduce commercial banks' interest rate spreads. 

Revealing its financial and monetary policies for 2014, the central bank governor said the economy is expected to grow 7.8 percent this year, with an inflation target of 4-6 percent in a lower interest rate regime. 

The index is in an overbought region for a second session with its 14-day relative strength index at 75.785, above the upper neutral level of 70, Thomson Reuters data showed. The index gained 4.8 percent in 2013 after losses in the previous two years, giving a return of 2.18 percent in dollar terms. 

Many investors locked their funds in risk-free debentures instead of risky assets due to a sluggish bourse amid falling interest rates. Foreign investors bought 7.8 million rupees worth of shares on Friday after buying a net 22.88 billion rupees worth of stocks last year, compared with a record 38.68 billion rupee net foreign inflow in 2011. 

The day's turnover was 349.6 million rupees ($2.67 million), less than last year's daily average of about 828.4 million rupees. 

($1 = 130.7250 Sri Lanka rupees) 

(Reporting by Shihar Aneez; Editing by Sunil Nair and Robert Birsel)

Source: http://in.reuters.com

Sri Lanka to reduce ‘Non Banking Financial Institutions’ to just 20 from current 58

Sri Lanka is planning to reduce the 58 Non Banking Financial Institutions (NBFI) operating in the Island to just 20 to enhance the sector's resilience to face internal and external shocks, announced Central Bank Governor Ajith Nivard Cabraal.

Accordingly, Central Bank is asking larger NBFI’s to acquire or merge with smaller financial institutions and small NBFIs are being encouraged to merge with one another to create large firms.

Authorities are also encouraging Licensed Banks to acquire NBFIs.

“A corporate group will be allowed to operate only one NBFI after end June 2014″, said Nivard Cabraal.

Central Bank is also asking new investors, banks or large NBFIs to acquire negative net worth NBFIs or selected lowly capitalized financial institutes with the new equity investments made directly into the negative net worth NBFIs or selected lowly capitalized NBFIs in order to supplement the capital of such NBFIs.

“When a new investor makes an equity investment of that nature, a matching long term advance will be made through the Sri Lanka Deposit Insurance and Liquidity Support Scheme on concessionary terms”, announced Cabraal.

Central Bank says when the consolidation process is completed by the year 2018 as planned, each Non Banking Financial Institute will have an asset base of Rs. 20 billion.
www.news360.lk

Sri Lanka stocks at 11-week high on lending rate cut, positive outlook

COLOMBO, Jan 2 (Reuters) - 

The Sri Lankan bourse rose for a fifth straight session to an 11-week high on Thursday as investors bought banking shares after the central bank cut its standing lending facility rate by 50 basis point to a multi-year low. 

Before the market opened for trading, the central bank slashed the standing lending facility rate or reverse repurchase rate by 50 basis points to 8.00 percent, in a move to reduce commercial banks' interest rate spreads. 

The main stock index gained 0.93 percent, or 55.26 points, to 5,968.04, its highest close since Oct. 17. Revealing the 2014 financial and monetary policies, Central Bank Governor Ajith Nivard Cabraal said Sri Lanka's economy is expected to grow 7.8 percent this year, with an inflation target of between 4-6 percent in a lower interest rate regime. 

"Rate cut and the positive outlook on the road map helped the market," said a stockbroker on condition of anonymity. The index is now in an overbought region as its 14-day relative strength index hit 76.053, above the upper neutral level of 70, and higher than Tuesday's close of 69.332, Thomson Reuters data showed. The stock market was closed for a special holiday on Wednesday. 

The index gained 4.8 percent in 2013, snapping losses in the previous two years, giving a return of 2.18 percent in dollar terms. 

Many investors locked their funds in risk-free debentures instead of risky assets due to a sluggish bourse amid falling interest rates. 

Foreign investors were net sellers for the first time in seven sessions. They sold 350 million rupees ($2.68 million) worth shares on Thursday after buying a net 22.88 billion rupees worth of stocks last year, compared to a record 38.68 billion rupee net foreign inflow in 2011. 

The day's turnover was 944.1 million rupees, well above last year's daily average of around 828.4 million rupees. 

($1 = 130.8000 Sri Lanka rupees) 

(Reporting by Ranga Sirilal and Shihar Aneez; Editing by Sunil Nair)

Source: http://in.reuters.com

SEC mulls ‘independent opinion’ on offer price for future IPOs

The Securities and Exchange Commission (SEC) has carried out a study to assess the possibility of mandating the justification of the ‘fairness of the Initial Public Offering (IPO) offer price’ by an independent and competent party, an year-end review by the SEC noted.

Overpricing was identified as one of the key reasons for some of the post-war IPOs to fail by a section of the country’s analyst community.

Meanwhile, the SEC and the Colombo Stock Exchange (CSE) is currently engaged in discussions with information technology (IT) and business process outsourcing (BPO) companies in the country to identify the possibility of getting them listed.

“IT/BPO industry initial discussions were held in November 2013 to identify the possibility of listing to raise capital. A follow-up awareness session with representatives of the Sri Lanka Association of Software and Service Companies (SLASSCOM) is scheduled for January 2014,” the review noted.

Both the SEC and CSE have been trying to get more privately held companies to go public to develop the country’s capital market. A separate initiative is currently underway to see the possibility of getting the state-owned enterprises.

With the intention of attracting further foreign direct investment into the country, a concept paper has been finalized to list the Board of Investment (BoI) companies.

“The inputs from the CSE and BoI were also considered during the process. A presentation in this regard was made to BoI representatives,” the SEC said.

http://www.dailymirror.lk/mirror-stock-watch-live/41056-sec-mulls-independent-opinion-on-offer-price-for-future-ipos-.html