Analysts say bourse needs to brace for a taxing year

Analysts say bourse needs to brace for a taxing year
2016-01-12 08:26:44

Sentiments negative amid rising interest rates
Equities would be on wealth preservation mode
Possible outflow of funds from equities to fixed assets
Net outflow from CSE in 2015 at US $ 4.4bn


By Shabiya Ali Ahlam
Prospects for Sri Lanka’s stock market this year remain rather bleak though some market analysts say the situation may improve towards the latter part of the year provided the confidence factor in place.

Market sentiment has remained negative with fears of investors opting to invest in fixed assets from riskier stocks in the backdrop of rising interest rates.
On top of that, the negative proposals the November Budget slapped on the country’s banking sector have also dampened the investor interest.

“Equities this year would be on a wealth preservation mode as the macro scenario, fiscal policy and foreign inflows may not be encouraging,” observes Bartleet Religare Securities Head of Research Nikita Tissera.

He noted that both the benchmark and secondary market rates were expected to move up.

Although the relation between the interest rates and stock markets is fairly indirect, the two always tend to move in opposite directions.

Sri Lanka’s Central Bank, a couple of weeks back, signalled the initiation of a monetary tightening by hiking the Statutory Reserve Ratio (SRR) on commercial banks by 150 basis points claiming to mop up the excess liquidity in the market that could fuel inflation and create balance of payment issues.
“The effects of the SRR hike may not be immediately felt but may have to be accompanied by a policy rate hike,” Tissera stated.

Reflecting this view was also market analyst Srimal Liyanage who stated the situation would be rather grim for equity investments when the rates increase.
He said that the investors may look at less risky interest-bearing securities if the expected return from equity did not compensate the additional risks borne.
“Increasing interest rates would also negatively impact corporate earnings, specially impacting the valuations of companies which are highly geared and have high exposure to government bond investments,” Liyanage said.

While fears loom that the US Fed increasing its rates could exert pressure on the rupee, analysts warn that the Central Bank delaying a rate revision will add further pressure, which could lead to currency devaluation.

The devaluing currency will have a direct impact on foreign investments in dollar terms.

It is expected that the US revising rates will result in a positive investor sentiment towards Western equities and other investment options.

“Already we are experiencing a flight of capital in terms of foreign investments with continuous foreign selling in major stocks,” pointed out Liyanage.

Against an inflow of Rs.33.9 billion in 2013 and Rs.21.7 billion in 2014, the Colombo Stock Exchange (CSE) experienced a net outflow of Rs.4.4 billion in 2015.

Stating the outflow must be seen in the context where globally funds have moved out of Asia last year, CSE CEO Rajeeva Bandaranaike said, “If you compare Sri Lanka with the other markets, we are certainly better off. Our outflow has not been that significant as in other nations.”

According to Colombo Stock Brokers’ Association (CSBA) chief Ravi Abeysuriya, the investors should use the current situation to their advantage.
He said that the best time to invest is when the market is down and not when it is doing well.

“At some point the market will be extremely well positioned for investors to come in. That is where any prudent or smart investor will have to work with good investment advisor to ‘selectively invest’,” Abeysuriya said.


Shares end at 1-1/2-year lows
Sri Lankan shares fell for a sixth straight session, to mark their lowest close in 1-1/2 years, led by declines in diversified and banking stocks due to local and global concerns, brokers said.

Fears over investors shifting to risk-free assets such as government securities due to rising yields in government securities dented sentiment.

The main stock index ended 1.13 percent or 75.96 points down at 6,650.32, the lowest close since July 9, 2014. The index fell as much as 1.4 percent, posting its biggest fall since August 25, 2015.

The bourse dipped further into an oversold territory yesterday with the 14-day relative strength index at 22.844 points versus Friday’s 28.357, Reuters data showed. A level between 30 and 70 indicates the market is neutral.

“Market is down with a lot of negativity. Local and global concerns weighed with no positive news,” said Danushka Samarasinghe, Research Head at Softlogic Stockbrokers in Colombo.

The day’s turnover was at Rs.991.2 million, its highest since January 6.

Foreign investors were net sellers of Rs.138.86 million worth of equities yesterday extending the year-to-date net foreign outflow to Rs.1.68 billion worth of equities, as compared with Rs.4.43 billion outflow in 2015.

World stocks fell to near 2-1/2 year lows yesterday as a fresh pounding for Chinese markets left Asia at a four-year trough and sent oil and commodity markets sprawling again.

Local investors are worried of more monetary tightening after the Central Bank raised commercial banks’ statutory reserve ratio by 150 basis points with effect from January 16.

Following the Central Bank’s move, the yield on 91-day T-bill rose 14 basis points to an over-two-month high of 6.59 percent at a weekly auction on Wednesday.

Analysts expect more investors to shift from risky assets to fixed assets with higher interest rates and shrinking of global investments in Sri Lanka.
Shares in conglomerate John Keells Holdings PLC fell 1.6 percent and Cargills (Ceylon) PLC slipped 6.9 percent, dragging the overall index. Biggest listed lender Commercial Bank of Ceylon PLC fell 1.2 percent.

(REUTERS)