Bourse outperforms gold; appears set to beat T-bill returns in 2013

Monday, 15 July 2013 01:13 - - {{hitsCtrl.values.hits}}

With most asset classes having been hit hard over the last few months, DNH Financial says at current levels, the Colombo Stock Exchange’s All Share Index has outperformed popular investment commodities such as gold on an YTD basis even though having still underperformed against domestic T-bill rates. Following are excerpts from DNH Financial’s observations.

Gold unlikely to regain its lustre anytime soon While at current interest rates, although T-bill investors appear to be still generating a higher YTD rate of return viz-a-viz the ASPI, juxtaposed against the performance of blue-chip stocks, T-bills appear to have however yielded a considerably lower rate of return during the period, a trend we believe is likely to remain during the remainder of 2013 with blue-chips expected to continue to outperform. Buy stocks, not the market Despite generally subdued domestic investor sentiment, it is highly encouraging to note that blue-chip stocks have outperformed reporting strong gains mainly in the food and beverages, healthcare, banking and finance and diversified sectors and supported by firm foreign buying. On the back of the twin impact of a further slide in interest rates and the bearish outlook for gold, the Bourse is expected to recover, spearheaded by strong performances in blue chips which are likely to generate a rate of return relatively higher than competing asset classes on both an absolute and risk adjusted basis. With the yellow metal having lost its safe haven appeal and its price unlikely to recover anytime soon, current stock market conditions present an opportunity for investors not following the herd to invest in a basket of stocks that are likely to outperform both T-bills and gold.

Improving economic outlook will provide backdrop for healthy EPS growth Corroborating the overweight position on blue-chip stocks, it is believed that with Sri Lanka’s economic outlook expected to improve over the next few quarters, it is likely to provide a robust backdrop for corporates to produce healthy earnings, especially in quality counters. While consumables, diversified, banking and tourism sectors remain bullish, it is believed that the margins of industrial companies may ameliorate going forward, should inflationary pressures continue to decline thereby providing buying opportunities within the sector. Time to shed the scepticism While the number of sceptical market participants sitting on the sidelines appears to have built up given the presumption that the bourse simply has to retreat before it can move upwards, a key argument underlying our overweight recommendation is that corporate fundamentals are likely to improve further for blue-chip counters. The majority of the stocks we recommend are in the banking, diversified and tourism sectors. While these companies possess significant long-term fundamentals and produce substantial cash flow, many of them have suffered price declines over the last few months producing attractive buying opportunities often at single digit valuation multiples. Go intrinsic rather than extrinsic The current market conditions provide an attractive 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 Bull Run phase, the current lull in the market should be viewed as chance for investors to do their homework and seek out companies that will generate firm top line growth with robust cash flows and benefit from the strong domestic consumption cycle. Given that intrinsic values are more stable than extrinsic values (which are largely affected by external factors investors are advised 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. Given the lack of a suitable catalyst, the market is expected to trade sideways next week (however, with the possibility of an upward bias).