Friday, 27 March 2020

Trends Shaping Sri Lanka's Bond Market

LOW BORROWING RATES AND TAX CUTS HAVE POTENTIALLY TRANSFORMED THE ECONOMY. WHAT DOES IT MEAN FOR THE GOVERNMENT SECURITIES MARKET AND FOR INVESTMENT STRATEGY?

Sweeping tax cuts and a moratorium on small business loans capital repayments will potentially drag Sri Lanka’s economy out of the doldrums. Apart from the government’s fiscal stimulus, the economy will potentially transform with the Central Bank reducing monetary policy rates; lower lending rates will lift credit growth and consumption. General elections slated for April 2020 will likely enhance political stability which is also growth positive.

“The heavy tax cuts and the lower interest rate regime are expected to boost consumption and investments, improving GDP growth. However, the acceleration is likely to take place towards the second half of 2020. Thereby, we expect growth to reach 4.1% during the year,” First Capital Research said in its flagship ‘Strategy Report 2020: Fiscal loosening weakens 2H2020 outlook’ released in February at a well-attended business forum in Colombo.



The First Capital Research Team, from left: Hiruni Perera, Senior Research Analyst, Nisansala Kuruppumudali, Research Analyst, Atchuthan Srirangan, Assistant Manager Research, and Dimantha Mathew, Head of Research.

First Capital is a listed investment bank in Sri Lanka. The economy will continue to pick up steam heading into 2021 but will slow down during the second half.

However, economic growth for 2021 will be an improved 4.3%, a five-year high, the investment house said. What does all this mean for an investment strategy? With the economy improving and interest rates trending downwards, equities are looking more attractive than in recent years. The heavy tax cuts and the policy rate cut are likely to be an added boost for company earnings. With attractive multiples, First Capital has upgraded its equities outlook and is bullish that the Colombo stock exchange’s All Share Index will reach 6,500 points by June 2020 and increase to 7,500 points by end December 2020, significantly higher than its earlier forecast of 7,000 points.

Equities, however, are risky and cannot match the security offered by government treasury bills and bonds.

First Capital recommends an investment strategy of holding government securities with shorter tenures because yields will likely pick up towards the second half of 2020. Pressure on bond yields to rise will mainly come from the government’s increased domestic borrowing requirement, pushing the yield curve higher by 50-100 basis points. Market borrowing rates will also trend slightly upward. Bank prime lending rates usually lag the five-year bond yields by six months. The Central Bank recently imposed lending caps on banks to force interest rates down. The average weighted prime lending rate (AWPR) for the banking sector has bottomed out at around 9.5% and will slightly increase in the second half of the year. The fiscal stimulus will make it difficult for the government to manage the budget deficit as tax revenues decline.

Although rupee debt repayments remain low in 2020, a potentially high budget deficit is likely to be created with the hefty tax cuts. The high budget deficit is likely to push the rupee debt borrowing requirement also higher. The trade deficit may also grow wider towards the second half of 2020 amidst the possible rise in consumer demand possibly leading to a high level of consumer imports, pressuring the foreign reserve and the rupee,” First Capital says. There are higher external debt repayments due including a $1 billion sovereign bond maturing in September 2020. First Capital expects the rupee to depreciate by 4.6% against the US dollar in 2020 despite a stable run in the first half of the year. Sri Lanka’s total debt repayment for 2020 is Rs2.4 trillion. Debt to GDP is expected to increase to 85% in 2019 but dip marginally to 84% in 2020 due to higher GDP growth, lower debt repayments and foreign direct investments mainly into the Colombo Port City. While overall bond repayments will dip in 2020, foreign debt repayments remain high in the second and third quarters.

“The Year 2020 illustrates a notable reduction in repayments especially in the first and fourth quarters, however, we expect foreign payments in the range of $300-350 million to exist monthly in the form of project loan repayments with relatively high repayments in the second and third quarters,” First Capital notes. The policy rate cut on top of the fiscal stimulus prompted foreign selling of government securities which impacted market liquidity. However, due to restrictive foreign holdings, the market impact was low. Private sector credit improving to 14% in 2020 will further tighten liquidity. Sovereign rating risk is another concern. The government’s fiscal stimulus has been criticized by sovereign rating agencies. Fitch downgraded the outlook on Sri Lanka to ‘Negative’ indicating a possible rating downgrade in the future.

This will likely make capital raising in international markets more expensive. The rating downgrade risk is offset by the South Asian region’s economic growth prospects. With the US Fed expected to hold rates, foreign investors could find the region’s bond markets attractive, particularly in Sri Lanka with improved political stability and growth. However, ensuring fiscal discipline will be critical to ensure the tax cuts and monetary easing have their desired effect on the economy.
Source:https://echelon.lk/trends-shaping-sri-lankas-bond-market/

Wednesday, 19 February 2020

Sri Lanka banks trading at 10-yr low valuations: First Capital

ECONOMYNEXT- Sri Lankan banks are trading at a ten year low valuation, with upward pressure on performance after a challenging 2019, a research firm said.

“Compared to frontier and emerging markets, Sri Lankan banks have the lowest price to earnings ratios,” First Capital Senior Research Analyst Hiruni Perera said.

“Banks are still undervalued in Sri Lanka. Banking stocks are at a ten year low,” she said, speaking at the First Capital Investment Strategy 2020 Second Research Conference held on Tuesday.

Sri Lankan banks had ended 2019 at a price to earnings multiple of 5.4 and a price to book value multiple of 0.7.

The price to earnings multiple of India-based Axis Bank Ltd was 17.3 at end-December, while Bank of the Philippine was 12.3 and Malayan Banking Berhad was 11.5.

The Colombo Stock Exchange had ended the year with a price to earnings multiple of 11.6.

FC Research Assistant Manager Atchuthan Srirangan said with the government removing the Nation Building Tax and the Debt Repayment Levy, net profits at banks will rise 9 percent.

The government has also announced bank income tax will fall to 24 percent from 28 percent.

With a bullish view on banking stock Srirangan said banks with high capital and a digitization edge will outperform the sector, as digital banking growth has outpaced traditional transactions at brick and mortar branches.

Profits at banks which fell 4 percent in 2019 with constrained capital and rising bad loans, will grow at a compounded 19 percent up to 2021, he said.

Return on equity is expected to rise to 12 percent in 2021, First Capital has estimated, from 10 percent in 2019.

Credit growth is expected to pick up in the latter half of 2020 and early 2021, while bad loans will moderate with higher economic growth and the breathing room borrowers receive from loan moratoriums, he said.

Meanwhile, the capital constraints on banks will ease, as many have raised equity during the year, while larger banks such as Sampath, HNB, Seylan and NDB will face lower capital requirements due to the D-SIB rule change, which will give them room to expand, Perera said.

Annual private credit growth, which had fallen to 4.5 percent in 2019, would rise to 14 percent in 2020 and 2021 amid a low interest environment, Srirangan said. 

Thursday, 31 October 2019

Sri Lankan shares post over 13-week closing high; rupee firmer

Reuters: ** Sri Lankan shares rose on Thursday to close at their highest in more than 13 weeks as investors took positions two weeks ahead of presidential polls, analysts said.

** Sajith Premadasa, the housing minister and one of the two presidential front-runners, announced his election manifesto, which is seen by analysts as a “broader policy framework”. His close rival Gotabaya Rajapaksa has pledged a tax overhaul that would reduce tax to 8% from the current 15% and abolish many taxes. 

** Many political analysts Reuters spoke to said the tight race between the two presidential candidate was still on.

** The benchmark stock index ended 0.55% firmer at 5,990.24, its highest close since July 29. The index rose 1.2% last week, but is down 1% for the year.

** Financial and telecom stocks were among the top gainers, with Hatton National Bank Plc rising 2.9%, Sri Lanka Telecom Plc ending 2.2% firmer and Dialog Axiata Plc adding 0.8%.

** The rupee ended 0.25% firmer at 181.05/30 per dollar, compared with Wednesday’s close of 181.50/60. The currency is up 0.86% so far this year.

** Foreign investors were net sellers of riskier assets for the seventh straight session on Thursday.

** They sold net 102 million rupees ($563,380) worth of shares, extending the year-to-date net foreign selling to 4.32 billion rupees of equities, according to index data.

** Equity market turnover was 1.28 million rupees ($7,069.87), well above this year’s daily average of about 667.6 million rupees. Last year’s daily average was 834.0 million rupees.

** Meanwhile, foreign investors bought government securities on a net basis for the first time in three weeks, buying a net 1.97 billion rupees worth of government securities in the week ended Oct. 23.

** Total foreign outflows from government securities through Oct. 23 stood at 53.63 billion rupees, according to central bank data.

** Sri Lanka’s central bank left its key rates unchanged on Oct. 11 after loosening policy earlier this year, although growth is likely to remain subdued as the economy faces rising global risks.

($1 = 181.0500 Sri Lankan rupees) 

(Reporting by Ranga Sirilal and Shihar Aneez; Editing by Subhranshu Sahu)

Monday, 21 October 2019

Sri Lankan stocks end flat; rupee strengthens

Reuters: ** Sri Lankan shares closed flat on Monday, as gains in consumer staples were offset by losses in telecommunications shares, while investors also waited for policy manifestos of key presidential candidates. The rupee ended firmer. 

** The benchmark stock index closed 0.01% higher at 5,863.99. The index has fallen 3.11% so far this year. 

** Meanwhile, the rupee ended 0.14% firmer at 181.70/80 per dollar compared with Friday’s close of 181.95/182.10. The currency is up 0.49% so far this year. 

** Foreign investors bought riskier assets for the second time in 14 sessions as campaigning got underway for the country’s presidential election scheduled on Nov. 16. 

** They purchased a net 216.2 million rupees ($1.19 million) worth of shares on Monday, but they have been net sellers of 3.78 billion rupees of equities so far this year, according to index data. 

** The two presidential frontrunners, former wartime defence chief Gotabaya Rajapaksa and housing minister Sajith Premadasa, are yet to announce their policy framework. Analysts said investors are waiting to see policies on tax, subsidies, and private businesses. 

** Equity market turnover was 1.17 billion rupees ($6.44 million), well above this year’s daily average of about 664.9 million rupees. Last year’s daily average was 834.0 million rupees. 

** Meanwhile, foreign investors sold government securities on a net basis for the eighth time in nine weeks, selling a net 724.9 million rupees worth of government securities in the week ended Oct. 16. 

** Total foreign outflows from government securities through Oct. 16 stood at 55.6 billion rupees, as per central bank data. 

** Sri Lanka’s central bank left its key rates unchanged last week after loosening policy earlier this year, although growth is likely to remain subdued as the economy faces rising global risks. 

($1 = 181.7000 Sri Lankan rupees) 

(Reporting by Ranga Sirilal and Shihar Aneez; editing by Uttaresh.V)

Friday, 18 October 2019

Sri Lankan stocks end higher; rupee strengthens

Reuters: ** Sri Lankan shares closed slightly higher on Friday, buoyed by telecom and diversified stocks. The rupee ended firmer. 

** The benchmark stock index closed 0.06% higher at 5,863.48. The index gained 0.49% for the week, but has fallen 3.12% so far this year. 

** Meanwhile, the rupee ended 0.03% firmer at 181.95/182.10 per dollar compared with Thursday’s close of 182.00/10. The currency is up 0.36% so far this year.

** Foreign investors bought riskier assets for the first time in 13 sessions as campaigning got underway for the country’s presidential election.

** They bought a net 145.4 million rupees worth of shares on Friday, but they have been net sellers of 3.99 billion rupees of equities so far this year, according to index data.

** One of the two presidential frontrunners, former wartime defence chief Gotabaya Rajapaksa, has won the backing of President Maithripala Sirisena’s centre-left Sri Lanka Freedom Party (SLFP), in the election scheduled for Nov. 16.

** Rajapaksa and the other strong candidate Sajith Premadasa, the housing minister who has strong backing among the rural poor, started their campaigns last week.

** Equity market turnover was 1.05 billion Sri Lankan rupees ($5.77 million), well above this year’s daily average of about 662.3 million rupees. Last year’s daily average was 834.0 million rupees. 

** Foreign investors sold government securities on a net basis for the seventh time in eight weeks, selling a net 102.8 million rupees worth of government securities in the week ended Oct. 9. 

** Total foreign outflows from government securities through Oct. 9 stood at 54.9 billion rupees, as per central bank data.

** Sri Lanka’s central bank left its key rates unchanged last week after loosening policy earlier this year, although growth is likely to remain subdued as the economy faces rising global risks.
($1 = 181.9000 Sri Lankan rupees) 

(Reporting by Ranga Sirilal and Shihar Aneez; editing by Uttaresh.V)

Thursday, 17 October 2019

Sri Lankan stocks end higher on bargain hunting; rupee weaker

Reuters: ** Sri Lankan shares snapped two sessions of losses to end higher on Thursday as investors picked up beaten down stocks. The rupee closed weaker. 

** The benchmark stock index closed 0.40% higher at 5,860.09. The index has dropped 3.18% so far this year. 

** Meanwhile, the rupee ended 0.08% weaker at 182.00/10 per dollar compared with Wednesday’s close of 181.85/95. The currency is up 0.33% so far this year.

** Foreign investors were net sellers of riskier assets for 12th straight session as campaigning got underway for the country’s presidential election.

** They sold a net 10.7 million rupees worth of shares on Thursday, extending the year-to-date net foreign outflow to 4.14 billion rupees of equities, according to index data.

** One of the two presidential frontrunners, former wartime defence chief Gotabaya Rajapaksa, has won the backing of President Maithripala Sirisena’s centre-left Sri Lanka Freedom Party (SLFP), in the election scheduled for Nov. 16.

** Rajapaksa and the other strong candidate Sajith Premadasa, the housing minister who has strong backing among the rural poor, started their campaigns last week.

** Equity market turnover was 526.4 million Sri Lankan rupees ($2.89 million), less than this year’s daily average of about 660.2 million rupees. Last year’s daily average was 834.0 million rupees. 

** Foreign investors sold government securities on a net basis for the seventh time in eight weeks, selling a net 102.8 million rupees worth of government securities in the week ended Oct. 9. 

** Total foreign outflows from government securities through Oct. 9 stood at 54.9 billion rupees, as per central bank data.

** Sri Lanka’s central bank left its key rates unchanged last week after loosening policy earlier this year, although growth is likely to remain subdued as the economy faces rising global risks.

($1 = 181.9000 Sri Lankan rupees) (Reporting by Ranga Sirilal; editing by Uttaresh.V)

Wednesday, 16 October 2019

Sri Lankan stocks close lower for second day; rupee ends flat

Reuters: ** Sri Lankan stocks slipped for a second straight session on Wednesday, amid weakness in hotels and manufacturing shares, while the rupee ended flat. 

** The benchmark stock index ended 0.07% lower at 5,836.62. The index has dropped 3.56% so far this year. 

** Meanwhile, the rupee ended steady at 181.85/95 per dollar compared with Tuesday’s close. The currency is up 0.41% so far this year.

** Foreign investors were net sellers of riskier assets for 11th straight session as campaigning got underway for the country’s presidential election.

** They sold a net 95.6 million rupees worth of shares, extending the year-to-date net foreign outflow to 4.13 billion rupees of equities, according to index data.

** One of the two presidential frontrunners, former wartime defence chief Gotabaya Rajapaksa, has won the backing of President Maithripala Sirisena’s centre-left Sri Lanka Freedom Party (SLFP), in the election scheduled for Nov. 16.

** Rajapaksa and the other strong candidate Sajith Premadasa, the housing minister who has strong backing among the rural poor, started their campaigns last week.

** Equity market turnover was 540.2 million Sri Lankan rupees ($2.97 million), less than this year’s daily average of about 660.9 million rupees. Last year’s daily average was 834.0 million rupees. 

** Foreign investors sold government securities on a net basis for the seventh time in eight weeks, selling a net 102.8 million rupees worth of government securities in the week ended Oct. 9. 

** Total foreign outflows from government securities through Oct. 9 stood at 54.9 billion rupees, as per central bank data.

** Sri Lanka’s central bank left its key rates unchanged last week after loosening policy earlier this year, although growth is likely to remain subdued as the economy faces rising global risks.

($1 = 181.7500 Sri Lankan rupees) 

(Reporting by Ranga Sirilal; editing by Uttaresh.V)