Bull run at Bourse but value investments still persist: Asia Wealth

The Colombo stock market last week had one of the best bull runs on sentiments but according to Asia Wealth Management value investments still persists in the Bourse.

Here are excerpts from Asia Wealth Management’s last week’s report on the stock market.

The Colombo bourse soared during the week with the market registering 7.8% WoW growth to close positive, with majority of the counters delivering hefty gains. The All Share Index gained 430.5 points WoW to close at 5,926.9 points (7.8%), whilst the Milanka Price Index rose 494.8 points WoW to close at 5,588.2 points (9.7%). Indices benefited mainly on the back of the gains made by John Keells Holdings (9.0% WoW), Dialog Axiata (15.9% WoW), Commercial Bank of Ceylon (7.9% WoW), Cargills Ceylon (20.3% WoW) and Vallibel One (34.3% WoW).

The Colombo bourse extended its rally to this week with the bench mark All Share Price Index surpassing 5,900 points whilst, recording a turnover level over Rs. 3.2 billion on Friday which exceeded the Rs. 1 billion mark for the seventh consecutive day. During the two weeks period (3 Sep-14 Sep 2012), the bench mark index ASI gained 746.8 points and the market capitalisation increased by Rs. 311.8 billion with YTD return standing at -2.4 % which improved by 13.4 percentage points. It’s noteworthy to mention that the buoyant growth witnessed in the market was not only driven by the retailers but also by the institutional and foreign investors who were keen on fundamentally sturdy counters. Thus, premier blue chip counters too saw active participation with significant gains being recorded. Aggressive buying that boosted the market performance and strong optimism, at times limited the market liquidity to a certain extent, would have presumably pushed the price levels up.

The average daily turnover of the week was Rs. 2,050.4 million whilst the average daily volume was 118.5mn shares. The week saw foreign purchases amounting to Rs. 2,088.6 million whilst foreign sales amounted to Rs. 1,283.3 million. The market capitalisation as at the end of the week stood at Rs. 2,267.4 billion.

It was less than three months back that the Colombo Bourse in a survey was ranked as the fourth worst performing stock market in the world, with a YTD return of -22% being recorded by the ASI. This could be partly attributed to a deterioration of macroeconomic fundamentals including rising interest and inflation rates, a depreciating Rupee and a worsening trade deficit, as well as a shift in retail investor interest from equities towards fixed income securities and other less risky avenues of investment.

More recently, the ASI has witnessed a remarkable turnaround with both indices witnessing sustained upward movements, resulting in ASI’s negative YTD return reducing to -2.4% at the end of the week. This development can be traced back to the appointment of the new SEC Chairman at the beginning of the month, which was also marked by a noteworthy increase in retail investor participation which is evident in the large daily trades and volumes(Fig i) recorded over the month. Given that this turnaround was not marked by any significant improvement in the countries macroeconomic or financial regulatory environment, a rational explanation for this development remains elusive. It was observed that small cap retail investor favourites witnessed significant price appreciations over the month.

Although such price rises maybe deemed to be unjustified, we have in our past reports identified based on strong earnings performance, several fundamentally sound counters including Aitken Spence Hotels, CIC Holdings, Tokyo Cement which we believe were trading at prices not justified by macroeconomic realities and expected future performance.

A positive outcome of this general improvement in investor confidence is the corrections which have been witnessed in our recommended counters and “key buys”. As a result several of these counters have approached their fair value (See fig iv). Hence we are in the process of reviewing our “key buys” to assess whether a change in our recommendations is merited. Further, we advice investors to realise profits in counters which have witnessed price movements above their fair value whilst accumulating fundamentally sound counters that possess further upside potential.

The significant index movements of the Colombo bourse has been mirrored by a rise in the PE multiple, which has approached 13.9X, which is comparable with regional peer averages (Fig iii).

Despite this a net foreign inflow has persisted through the months of August and September (Fig ii).Further, a net foreign inflow of Rs. 701.5 million recorded over the week reinforces this fact.

This confirms that despite the less attractiveness of the market as a whole as indicated by the relatively high PE multiple, the continued presence of foreign institutional interest which are likely to be driven by fundamental factors gives weight to the claim that valuable investment opportunities continue to persist.