ASPI tracks MSCI Emerging Market performance

Contrary to popular rhetoric, foreign investor sentiment appears to have a not inconsiderable impact on the ASPI’s performance, as can be seen in the chart in which the MSCI Emerging Markets Index has been juxtaposed against the ASPI.

DNH Financial said with foreign participation accounting for approximately 30-50% of daily market turnover, it is not surprising thawt a strong correlation exists between emerging market performance and the ASPI’s trajectory on an YTD basis. Notwithstanding this however, given the robustness of the domestic economy and its impact on corporate EPS growth, it is believed that the Colombo Bourse will be spared much of the contagion that may continue to sweep through major markets in Europe and in other areas as a result of the Eurozone debt crises.



Commenting on the market’s trajectory, DNH said that with robust EPS growth expected in selected counters, it recommends investors to focus on companies that are liquid, cash generative, have a dominant market position and are intrinsically sound while advising against taking speculative positions in stocks.

“We reiterate a focus on companies with sustainably high ROCEs and defendable competitive advantages, resulting in above average earnings growth potential that is still not fully factored into share prices,” it said. “In terms of market trajectory, we expect the Bourse to re-test the 6,500 key resistance level over the coming weeks, although intermittent bouts of profit taking could result in temporary dislocations,” DNH added.

Heading into the last few weeks of 2Q2013, DNH also expects a number of themes to emerge which are likely to shape the market trajectory; volatility in the global markets as they continue to capitulate to US and Eurozone debt tensions which could encourage foreign fund managers to increase their allocations to emerging/frontier markets such as Sri Lanka (even though foreign participation in the local bourse could peter out slightly in the short term if the sell-off in global equities continue), the likelihood of an improvement in 2Q2013 corporate EPS growth for listed blue chips which should in turn result in a decline in the PE and PEG valuations in turn providing a trigger for medium term to longer term buying interest.

The convergence of these factors is likely to provide the perfect backdrop for the Sri Lankan Bourse to commence its re-rating, despite the fact that there could be sporadic bumps along the way.