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Colombo stocks see dreary prospects

Sunday Times | 30.07.2018

Colombo shares are hardly trading with the market losing money daily with analysts saying the next six months would be bleak on the back of political uncertainty plus foreign selling. They said that foreign investors sold diversified stocks such as conglomerate John Keells Holdings PLC and Aitken Spence PLC during the past few months and the country’s political system showed no signs of recovery impacting negatively on Colombo shares.

All these and inconsistent policies are bringing down trader sentiment, with investors resorting to the sidelines, they added. They noted that the country is heading towards a budget in a few months (November) which isn’t making it any easier for the sentiment to be optimistic. Also the impending elections in a few months (next year) will keep traders at bay for most of the year, they added.

Sri Lanka about seven years ago had a very expensive market with the price earnings ratio (PER) going to 20 times following the post war bull-run. Since then Sri Lanka has had askew movements despite some volatility over the years ranging from ASPI index value of 4800 – 7800.

The Colombo Stock Exchange failed to break the peak ASPI target of 7800 during 2011. “Despite the volatility of the index, earnings have had a steady growth pace of 10 to 15 per cent on a continuous basis. Rising bond yields and political uncertainty has made the conditions unpredictable for an average investor, resulting in low investor participation over the last few years,” an analyst said. Coupled with the negative investor sentiment with Federal rate hikes happening in the US and US bond yields rising, many fund flows shifted frontier and emerging markets towards the US resulting in continuous foreign outflows over the last few months in 2018.

But analysts say that the tide seems to be on the verge of turning for the better maybe after about six months. Following continuous growth in the earnings and further supported by the pickup in earnings in recent times after the slowness due to monetary tightening during 2017, the market valuations have become very attractive with Sri Lankan market PER falling to single digit of nine times.

“We are now one of the cheapest frontier and emerging markets. With earnings expected to continue with average growth of 10 to 15 per cent over the next five years as well Sri Lanka is poised to be one of the first countries that value-seeking investors would be targeting,” Dimantha Mathew, Head of Research First Capital Holdings PLC told the Business Times.

Further, large funds such as Black Rock and Templeton indicated that emerging and frontier markets are starting to look attractive and they would like to re-enter most of these markets, he said. He added that most funds are looking for markets that have bottomed out and consist of strong valuations. “We’ve already started having six consecutive days of net foreign inflows, though on a smaller scale which is an indication that the tide is turning.” Local investor interest and bargain hunting is also on the rise with overall market conditions and investor sentiment turning positive which is likely to signal a re-rating of the Sri Lankan stocks in the shorter term, another analyst added.