Focus on high dividend stocks advices DNH Financial

• Says positive economics will provide a tailwind

DNH Financial Ltd. is advising investors to focus on high dividend stocks whilst reminding that it is timely to review portfolio and asset allocation as positive economics will provide a tailwind for the Colombo Bourse.

Here are excerpts from DNH Financial’s stock market review:

The sideways market movement provides a strong opportunity for investors to become increasingly involved with macro themes in order to understand what is driving the domestic economy and what will sustain in the longer term. It also allows investors to focus on company fundamentals and their drivers of growth. Stable and generally inelastic sectors such as FMCG, F&B, utilities and healthcare tend to deliver steady growth and are less impacted by economic slowdowns, as such companies in these sectors are able to pay attractive dividends.

Consequently, dividend stocks tend to hold up well in directionless markets given that demand for these stocks generally increase as investors switch over to defensives. Following two years of strong gains, the majority of investors appear frustrated that the Sri Lanka bourse continues to remain stuck in a range bound phase.

While short term profits are difficult in trendless markets, we believe however that finding companies that are undervalued with growth drivers is likely to produce positive returns in the medium to longer term.

Consequently, investors are advised to refrain from applying a trend following strategy in the current sideways market but use the opportunity to review their portfolios in order to ensure that their allocations continue to reflect their risk appetite, investment goals and horizon. It is easy to shy away from the market on the conviction that the market may not trend upwards given the relative lack of a sufficient impetus or support. While we don’t rule out the possibility of further sideways movement as investors sit in the wings, we are nevertheless sufficiently convinced that the backdrop for a firm rise in the market may be in place sooner than later with positive economics providing the necessary tailwind.

With the 1Q2012 corporate results yet to be released, we do not expect the ASPI to immediately change its lackadaisical course.

However, better than expected corporate earnings could result in an inflection point provided that market sentiment improves.

In any case, we recommend investors to adopt an asset allocation strategy in line with their risk appetite and take advantage of the current price weakness to accumulate positions strictly on a stock specific basis.