By First Capital Research
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.
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