Sri Lanka stocks may slump more on rates - HSBC Private

Sri Lanka’s benchmark stock index, the world’s worst performer this year, may extend its slump as the central bank raises interest rates to curb inflation, according to HSBC Holdings Plc’s private banking unit.

HSBC Private Bank, which oversees about $499 billion, will wait for stock valuations to fall to “single digit” multiples before it considers buying shares, Arjuna Mahendran, Singapore- based head of Asia investment strategy, said in an interview yesterday. HSBC Private may purchase bank stocks, he said, declining to be more specific.

The benchmark Colombo All-Share Index lost 3 percent to 5,046.14 at 11:59 a.m. local time, set to close at the lowest level since August 2010, while the rupee tumbled 2.5 percent, poised for the lowest close since May 5, 2009. Stocks and the currency sank yesterday on concern consumer prices will accelerate after the government raised fuel costs. The monetary authority raised benchmark interest rates for the first time since 2007 on Feb. 3 to contain credit growth in the nation’s $50 billion economy.

 “Monetary tightening is always bad for the market,” said Mahendran. “The share market has been impacted and could be impacted for a little while longer. We have to watch prices.”

The Colombo All-Share Index has slumped 17 percent so far this year, the most among 93 major benchmark gauges tracked by Bloomberg. The Sri Lankan measure trades at 10.9 times reported profit, the lowest level since March 2009. The MSCI Emerging Markets Index (MXEF) is valued at 12 times earnings.

Some stocks “are quite cheap,” Mahendran said. “We start to buy when the multiples become single digit, 7 or 8 times.”

The strategist said in a Bloomberg Television interview in January last year that emerging stocks would take a “breather.” The MSCI Emerging Markets Index retreated 20 percent in 2011. He said in December 2009 that HSBC Private had been buying Pakistan stocks on dips. The Karachi Stock Exchange 100 Index gained 28 percent the following year.

The 241-stock Sri Lankan gauge slid 4.8 percent last week following the interest-rate increase and as the central bank abandoned a currency trading band to help conserve foreign- exchange reserves. The rupee declined 0.8 percent last week and has weakened 3.5 percent this week to 119.03 per dollar, the lowest level since May 2009, data compiled by Bloomberg show.

Ceylon Petroleum Corp., Sri Lanka’s state oil company, raised prices of several products effective Feb. 11 midnight, according to a statement published in the state-owned Daily News yesterday. The increases sparked protests by the transport and fisheries industries, the Xinhua news agency reported.   “There is selling pressure in the market as the move is expected to boost inflation expectations,” Bimanee Meepagala, a Colombo-based analyst at NDB Aviva Wealth Management Ltd., the nation’s biggest non-state fund, said by phone yesterday.

Consumer prices in the capital, Colombo, climbed 3.8 percent in January from a year earlier after gaining 4.9 percent in December.

Sri Lanka devalued the currency by 3 percent in November to boost exports. The central bank lowered the rupee’s trading band against the dollar on Feb. 3, Feb. 6 and Feb. 9, prior to announcing its removal. Central Bank of Sri Lanka Governor Ajith Nivard Cabraal said policy makers would “intervene” in the currency market through “supply and not based on price.”

The dismantling of the trading band came after calls by the International Monetary Fund for a more flexible exchange rate. Sri Lanka’s foreign-exchange reserves have dropped by about 25 percent from an unprecedented $8 billion last year, as the central bank sold dollars to defend the local currency.