Monday, 2 December 2013 00:00
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Construct a robust stock portfolio before stock mispricings are corrected
By First Capital Equities
Empirical evidence strongly indicates that medium to longer term equity investors in the Sri Lankan bourse have been rewarded despite intermittent bouts of volatility. Despite the discomfort of remaining invested during a sideways or downward biased market, those with a healthy investment horizon have come out markedly ahead.
Although investors may question the rationality of investing in Sri Lankan equities after a strong two year rally, we take however a notably different view on the belief that current valuations on a PEG basis provides a highly attractive entry point. Fundamental investors may be benefited even further as equity correlations peter out to more respectable levels and valuation metrics display more dispersion to appropriately reflect varying corporate growth prospects allowing investors to select and build a robust portfolio of quality stocks before mispricings are corrected and valuations rerate to market multiples.
Avoid speculative trading
We believe that the ‘herd mentality’ has been the main catalyst for bullish or bearish trajectories of the market in the recent past and should be avoided in order to preserve capital and generate sustainable alpha in the medium to longer term.
In order to benefit fully from a flight to quality strategy however, investors may need to maintain a healthy investment horizon and provide sufficient time for their investments to
generate alpha.
While the equity market has a notorious tendency to rush from one side to another in response to the ebb and flow of optimism or pessimism, we recommend investors to in response to the ebb and flow of optimism or pessimism, we recommend investors to make a directional call, build a quality portfolio and take advantage of what is increasingly becoming a ‘stockpickers’ market.
Market trajectory
Time to shed the scepticism: While the number of sceptical market participants sitting on the sidelines appears to be relatively large given the presumption that the bourse simply has to retreat before it can move upwards, a key argument underlying our positive stance on the bourse is that market fundamentals are robust with valuations for several stocks trading at highly attractive multiples.
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.
