EconomyNext – Although Sri Lankan stocks are up more than 20 percent this year, they still draw foreign investors, who till last week remained mainly net buyers, since valuations are attractive compared with regional peers, stock brokers and analysts said.
The latest corporate earnings are also attractive and earnings potential look healthy given the pace at which the economy is growing, they said.
This year, the benchmark All Share Price Index of the Colombo Stock Exchange is up 22.3 percent.
Foreign buying has led to a net inflow of foreign funds of 21.7 billion rupees this year, according to Oshan Dharmaratne, investment analyst at Lanka Securities. That compares with the 22.4 billion rupee foreign inflow in 2013.
Foreigners turned net sellers last week with a foreign fund outflow of 209 million rupees, according to Bartleet Religare Securities. Foreign volume last week amounted to nine percent of total share volume for the week.
"Although the ASPI is up 22.3 percent foreign investors still see value in the Colombo stock market," Dharmaratne of Lanka Securities said. "That’s because market PE (Price-to-Earnings) ratio is still attractive compared to peer markets."
The island economy is the fastest growing in South Asia having averaged seven percent growth each year since the ethnic war ended in 2009 while inflation has sunk to below two percent and interest rates kept low.
Foreign ownership of stocks listed on the CSE is now 37 percent of the total market value of 1,084 billion rupees, according to a Lanka Securities report.
Colombo bourse’s PE ratio is 13.21 compared with 13.86 on the MSCI frontier emerging markets index which is down 1.2 percent this year.
Colombo’s stock market turned choppy in late November after Presidential Rajapaksa announced a snap presidential poll.
He faces an unexpected challenge from a defector from his own party, former health minister Maithripala Sirisena, contesting as common candidate of a newly united opposition coalition, out to prevent Rajapaksa’s unprecedented bid for a third term.
Dimantha Mathew, Manager Research at First Capital Equities, said trading has slackened as investors adopted a wait-and-see attitude ahead of the January 8, 2015 poll and also because of the Christmas festive season.
"We expect a sideways movement in the index."
But there’s still foreign buying interest, the latest of which has focused on John Keells Holdings and Commercial Bank, two companies in the MSCI Asia index.
"The market is extremely attractive. If you take the September quarter results, profitability is up by 50 percent of all the companies, year-on-year. In terms of valuations, it’s attractive," Mathew said.
"Even though the market is more than 20 percent up this year, in the previous two years prices came down and profitability moved up.
This year profitability growth was a bit slower than last year but the market moved up because it is more attractive than most other frontier markets, Mathew said.
"Now with prices moving up, valuations have come to be on par with other frontier markets. Colomob’s not more expensive but on par."