Toned down market activity once again provides opportunities

Monday, 26 May 2014 10:31 - - {{hitsCtrl.values.hits}}

Market sentiment during the week remained rather subdued where both indices strolled down from the highs reached in previous weeks’ trading. Daily turnover also hovered below the levels seen during the recent rally that ended in a sudden pause. The news which broke out highlighting the continuous contraction in credit growth to the private sector despite the lowering of market and policy interest rates hand in hand with the recent spike in non-performing advances of the banking sector to 6.5% by February 2014 from 3.7% at the end of 2012 is in our perspective largely responsible for the reversal in market sentiment apart from the fact that market may have been over bought as a result of the rapid renewal of trading interest among both local and foreign investors witnessed during the past few weeks. In this light, it should be noted that the credit growth and NPLs are at more than satisfactory levels once the effects of pawning advances are discounted. As at March 2014 credit growth to the private sector without pawning advances reached 12.8% YoY (CBSL) while overall growth fell to 5.1% YoY in the corresponding period. This is to say that on one hand, the core sectors of the economy continue to absorb healthy levels of credit disbursements and on the other that NPLs which are mostly concentrated within the pawning sub-category (over 75%) can be written off with relatively lower losses due to the liquidness of gold as collateral. Further, the majority of the gold backed loans are concentrated within state-owned banking institutions and hence the impact on listed banks shouldn’t be significant especially given that the latter have taken sweeping steps to reduce exposure to pawning advances. In this light the low levels of trading activity currently prevailing in the Colombo Bourse in our view present precious opportunities to enter fundamentally sound counters at discounted price levels. Hence, we encourage investors to reap maximum benefit out of the opportunity that has been created.

Corporate earnings mixed

By Acuity Stockbrokers: Corporate earnings for the quarter ending March 2014 meanwhile, has been mixed, with approx. 51% of the 93 companies that have reported so far recording YoY gains. Continued earnings reports, particularly from the large-cap stocks, are likely to drive markets in the week ahead.