Thursday, 2 January 2014 00:00
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By First Capital EquitiesDisappointing ASPI performance
The bourse is up only 1.4%YTD (dollarised) in 2013, having underperformed against major developed and emerging markets this year. Despite this, bluechip stocks in the food and beverages, healthcare and banking sectors have reported double digit gains supported by foreign buying.
3Q2013 GDP growth accelerates to 7.8% with 2013 full year growth targeted at 7.0%
Outperforming nearly all other world markets, Sri Lanka’s 3Q2013 GDP grew by 7.8%, significantly above the 6.8% and 6.0% growth rates achieved during 1Q2013 and 2Q2013. Growth was spearheaded by 8.1% and 7.9% rise in the industry and services sectors while the agricultural sector recorded a growth of 7.0%.In terms of 3Q2013 sectoral composition, the services sector accounted for 59.0% of GDP while agriculture and industry represented 11% and 30% respectively.
With momentum expected to continue into 4Q2013, we expect the Government to achieve a 2013 full year GDP growth rate of 7.0%, amongst the highest economic growth rates in the world for 2013. Growth will be driven mainly by domestic factors while foreign capital flows should provide further support.
Net foreign buying down but not out
Notwithstanding eurozone debt tensions, most global equity markets rose during the year with foreign funds flowing into both developed and emerging market equities. Foreigners continued their buying spree with net inflows of Rs. 21.0 billion ($ 159.0 million) recorded so far in 2013, indicating their confidence in Sri Lankan equities despite a disappointing ASPI performance. Notwithstanding generally subdued domestic investor sentiment, bluechip stocks have attracted foreign investment.
Interest rates decline
Interest rates declined during the year with the weighted average deposit rate, prime lending rate and 12month T-Bill rate falling by 60 bps, 450 bps and 340 bps to 9.5%, 9.9% and 8.3% in November 2013.
Debentures mop up liquidity
Significant amount of debentures offered so far this year has reduced the appeal for domestic equities. Notwithstanding our expectation of a further softening in interest rates, companies have raised cash via debenture issuances which has had a direct impact on stock market turnover levels. Total funds raised via debentures in 2013 so far by corporates have crossed the Rs. 71.6 billion ($ 542 million) mark and with more and more institutions opting to generate funds via the debenture route, the likelihood of more debenture issues to be announced during 1Q2014 appears generally likely.
Uneventful 2014 Budget
The Sri Lankan Government unveiled a relatively uneventful 2014 Budget aiming to achieve a 2014 economic growth of 8.0% while targeting a budget deficit of 5.2% in 2014 (compared to 5.8% in 2013), falling further to 4.5% in 2015 and 3.8% in 2016. The Government has forecast 2014 total revenues of Rs. 1.47 trillion, while 2014 total expenditures have been forecast at Rs. 1.99 trillion (compared to 2013 total revenues of Rs. 1.20 trillion and 2014 total expenditures of Rs. 1.71 trillion respectively).
2014 themes
GDP growth will continue unabated at7.0%+ for 2014. However not all sectors and sub-sectors would benefit equally. Companies operating in F&B, construction, hotels and banking (select) are likely to record the most significant growth.
• EPS growth to recover in 2014 as a result of improved margins resulting from a decline in inflationary pressures. We advise investors to seek cash rich companies with strong free cashflows.
• Valuation multiples such as PE will continue to remain attractive vis-à-vis other emerging/frontier markets which could lead to increased foreign buying in the Sri Lanka bourse in 2014.
• Likelihood of reduced competition from alternative asset classes such as money market instruments and real estate investments which may result in a flow of funds back to equities.
• Bourse could rise in modest double digit terms with fundamentals overpowering momentum trading led by rise in bluechips.
• Investors advised to break away from the herd, maintain a healthy investment horizon and focus on investing in companies that will deliver quality earnings in 2014.
