Bourse gains 130 points; YTD net foreign inflow reaches Rs. 11 b

With all classes of investors either active or returning, the Colombo stock market last week enjoyed sustained momentum with a 130 point gain in benchmark All Share Index and net foreign inflow reaching the Rs. 11 billion mark.

The indicative downward regime in interest rates, resilient corporate earnings and robust net foreign buying are key reasons for the rebound in the Colombo Bourse of late. Year to date the ASI has given a positive 13% return whilst the blue chip S&P SL20 Index has gained by over 16%. The market is trading at 18 month high as well.

Following are some of the highlights of stock broker comments in their weekly reports.

Softlogic Stockbrokers

Positive vibes spurred the Bourse as the interest rates slash down brightened investor confidence strengthening accumulation. Foreign interest highlighted YTD net inflow of Rs. 11 billion.

As the quarterly earnings season commenced, majority of banks encountered a dip in 1Q2013 earnings due to large forex gains recorded in comparative quarters hence we advise investors not to be misled as a considerable growth in earnings was recorded on a normalised basis. We continue to be positive on the banking sector as the key listed players continue to trade at single digit PERs.

LOLC Securities

The market remained sluggish for the first two days while foreign participation was almost at negligible levels. Foreign investors came in to the play by Wednesday marking YTD Net foreign inflows Rs. 10 billion. Market started to rally since Thursday while at the end of the week ASI had gone up by 2.41% for the week. YTD net foreign inflows reached Rs. 11 billion by the end of the week.

Thirty-one crossings were recorded during the week out of which JKH recorded crossings of 1,499,403 shares at the range of Rs. 270-275. Other crossing makers were SPEN, CARG, COMB, DIAL, NDB and GLAS. Crossings contributed around 43% to the market turnover during the week.

Banking, Finance and Insurance sector contributed mostly to the market turnover while Stores and Supplies sector was the best sector index gainer with a gain of 12.27%.

JKH contributed mostly to the ASI growth (33.52 points) while CTC, SLTL and NEST contributed 19.92, 7.53 and 5.87 respectively. CINS dragged down the index by 2.09 points.

Acuity Stockbrokers

The market continued its uptrend as a 43 point loss early in the week was more than offset by a 171 point gain over the latter half of the week. Strengthened investor sentiment – both retail and institutional – on the back of last week’s interest rate cut along with strong gains by index heavy-weights helped the ASPI hit an intra-day high of 6400 on Friday and pushed the Y-T-D return on the benchmark index to 12% (cf. -7% in FY 2012).

Overall market value also reflected similar positivism with market capitalisation surpassing Rs. 2,400 billion on Friday to record a Y-T-D gain of 11%. Foreign activity meanwhile, continued to record healthy gains with Y-T-D net foreign inflows crossing Rs. 10 billion as accumulation of blue chips – particularly JKH – continued. Daily average turnover value meanwhile, remained above the Y-T-D average of Rs. 1 billion driven by large deals in Aitken Spence, JKH and NDB. Similar upbeat sentiment is expected in the week ahead.

Corporate earnings for the quarter-ending March have begun trickling in, with approximately 48% of the 25% corporates reporting thus far recording Y-o-Y gains in quarterly earnings. Meanwhile, interest rates, which have been a focal point for markets over the past few sessions, fell further this week following last week’s policy rate cut.

Benchmark Treasury yields across all maturities declined further this week, with rates on the 6M-Treasury down 29 bps to 9.91% while weighted average yields on the 3M and 1Y treasuries fell 43 and 45 bps respectively. Prime lending rates (PLR) were also lower, with the weighted average 1-week PLR down 36bps at 13.12%. Money market liquidity which has been consistently strong since January however, declined for the first time in 18 weeks, recording a deficit of Rs. 1.1 b. Consequently, inter-bank call money rates were marginally up by one bps.

Asia Wealth Management

After a hesitant start on account of profit taking, the market continued its upward trend adding 2.1% WoW to its index value. This could be a delayed reaction to the Central bank’s decision to ease policy rates and its monetary policy stance. In response to the policy rate revision, Treasury bill rates in the primary and secondary offers dipped whilst the Central bank kept a tight hold on liquidity to prevent excess borrowings which could spur demand-pull inflation, as inflation currently remains at an elevated level.

Contemporaneously the LKR strengthened against the USD over the week and according to currency dealers, this could be as a result of commercial banks translating dollar holdings to LKR in order to increase the supply of domestic loanable funds. This development along with a drop in Banks’ average weighted prime Lending rate (AWPLR) subsequent to the policy rate revision suggests that demand for loans could be on the rise. This would have implications for the future earnings of banking sector counters, which could witness growth in their loan books (which witnessed a slowdown in 1Q2013) and result in higher earnings.  This would explain the continued interest witnessed in banking sector counters which witnessed a slowdown in 1Q2013 earnings primarily due to currency conversion effects and a slowdown in loan growth. This could in turn have a positive trickle-down effect on the rest of the sectors of the economy as the lower interest rate environment could galvanise firms to invest in expansionary activities which could result in value creation for equity holders. This could partly explain the continued foreign interest in the domestic equity market which recorded a high net foreign inflow of Rs. 1.6 billion for the week.

DNH Financial

With the ASPI now up 14.3% on an YTD basis (in dollar terms), we expect the bourse to trade sideways (with an upward bias) during the coming week before re-rating again. As such we advise investors to use the current price weakness to pick up attractively priced growth stocks but by however entering the market in an informed manner. We also expect foreign participation to accelerate with blue chip counters likely to remain in focus given that several large quality stocks in Sri Lanka at current levels appear to be more attractively priced than their counterparts in competing emerging/frontier markets.

While we concede with the fact that most investors have largely been sitting in the wings over the last several months in anticipation of a market trigger that would propel the market to the next level, with the 1Q2013 corporate reporting season having now commenced, we advise investors to refrain from assuming any speculative positions but concentrate on carefully selecting counters that will benefit from the robust domestic consumption story and report sustainable earnings growth and healthy cash flows.