DNH Financial’s take on market’s trajectory

Monday, 24 September 2012 00:00 - - {{hitsCtrl.values.hits}}

Despite the last few days’ profit taking, the Sri Lanka Bourse is still the world’s best performer at 20.1% (in dollar terms), on a MoM basis comparing highly favourably amongst global peers.

Even though the market’s recent rise is mainly attributable to retail buying rather than institutional or foreign interest, we still view market conditions as a healthy entry point for investors to cherry pick quality stocks on weakness and keeping in mind an investment horizon spanning the medium to longer term. Fundamental investors may be benefited as valuation metrics display more dispersion to appropriately reflect varying corporate growth prospects thereby allowing investors to select and build a robust portfolio of quality stocks before stock mispricings are corrected and valuations rerate to market multiples.

Although balance of payments pressures are likely to continue on the back of high oil prices, Sri Lanka’s economic story still appears to be intact and will provide the necessary comfort to investors justifying the current market PE of 16X which appears relatively expensive compared to other frontier/emerging markets. Crunching the numbers, however, we expect PE compression to take place on the back of healthy 3Q2012 results with high EPS growth in several key sectors trimming any excessive build up in valuations. Market cap to GDP still very low compared to global EMs, leaving significant scope for market expansion. The percentage of total market cap to GDP is probably the best single broad measure of where valuations stand at any given moment. Taking the Sri Lanka Bourse’s current capitalisation of US$ 17 b compared to the country’s GDP of US$ 49 billion, the market cap/GDP ratio of 35% clearly indicates that the Bourse is significantly undervalued compared to global markets and leaves considerable room for market expansion.

(Excerpts from DNH Financial’s Weekly Stock Market review)