Monday Jul 08, 2024
Monday Jul 08, 2024
Monday, 13 January 2014 00:00 - - {{hitsCtrl.values.hits}}
Although the range bound market movement during 2013 in our view was vitally important to provide investors an opportunity to restructure their portfolios, knock out dead wood and fly to quality, it also had the added advantage of giving the bourse the opportunity to allow earnings to catch up thereby compressing PE multiples. While PE compression may not have been entirely achieved during 2013 given that the majority of companies had released lower than expected earnings, the window period nevertheless provided investors the opportunity to rebalance their portfolios and reposition themselves for a re-rating in 2014.
Will momentum sustain…?
Yes, in our opinion. The market consolidation in 2013 in our view has provided a solid foundation for the Sri Lanka bourse to enter a new cycle in 2014. We believe that the bourse is now entering a bullish phase with the gains in the ASPI accompanied by healthy trading volumes. While previous attempts by the bourse to cross the 6000 level have been snuffed out by high domestic interest rates, a flood of debenture offerings and general weak investment sentiment, we believe the ‘feel good factor’ is returning to the market with robust economic fundamentals, a recovery in corporate earnings and low interest rates providing the necessary impetus.
Flight to quality advised
The current market conditions provide a strong opportunity for investors to build a robust portfolio of stocks based on intrinsic values. While anecdotal evidence suggests that investors generally do not tend to concentrate significantly on fundamentals during a bullish phase, over a full market cycle high-quality stocks can not only outperform, but tend to do so with less volatility. Consequently, we advise investors to focus on high quality cash rich companies with strong balance sheets that have underperformed during periods of market over-exuberance and which have the upside potential to re-rate to their intrinsic values.
Go intrinsic rather
than extrinsic
Given that intrinsic values are generally more stable than extrinsic values (which are largely affected by external factors), we advise investors to look beyond the absolute price of a stock to its fundamental value which will ultimately determine its true worth, remembering that price deviations from value can occur only short term. Consequently, we advise investors to build a robust portfolio of quality stocks before stock mispricing are corrected and valuations rerate to market multiples.
Valuations to
remain attractive
As the market gains momentum, we expect corporate EPS growth to rebound with robust domestic macro-economic conditions providing the necessary backdrop. This we believe would provide the tailwind necessary to thrust the market into a sustainable rise resulting in a gradual increase in multiples, however not too high to cause a headwind. We believe that the PE compression consequently will emanate from high EPS growth which would trim any excessive build up in valuations thus keeping valuations at reasonable levels. The net effect would be a relatively low PEG that would attract investment into the bourse on a sustainable basis resulting in healthy turnover levels.
