ECONOMYNEXT – Sri Lanka’s stocks lagged the performance of bond markets in 2017, with the Colombo All Share Index up 2.2 percent while bond prices rose with the 10 year yield plunging over 200 basis points amid fiscal and monetary tightening.
The Colombo All Share Index rose ended in December at 6,228.28 points while the S&P Index of more liquid stocks rose gained 5 percent to end the year at 3,871.72 points.
The market price earnings ratio fell to 10.6 by end December 2017 on published results from 12.4 in 2016, indicating that stocks are broadly cheaper, though individual companies have made gains.
The price to book value fell to 1.31 by year end from 1.4 in 2016.
The market dividend yield rose to 3.19 percent from 2.8 percent, indicating that firms were paying higher volumes of dividends at current prices.
On the macro-economic front monetary tightening in 2016 had slowed private credit and ended central bank money printing, ending a balance of payments crisis triggered by a disastrous 2015 budget which was accommodated by rate cuts and liquidity releases by the central bank.
Fiscal tightening with higher value added taxes in 2017 and a wage freeze for two years after a steep hike in 2015 have brought state finances back to square one.
However high yield bond sold at longer tenures in 2015 and 2016 amid much controversy will continue to be a drag on the budgets for years to come. A private firm will try to borrow short when rates spike.
Bond yield fell sharply over 2017 though with private credit slowing, and inflation high with the central bank continuing to depreciate the currency, targeting a real effective exchange rate index, the effects are still not felt on companies.
Sri Lanka ended 2017 with inflation of 7.1 percent, overshooting the mid-single digit inflation target of the central bank. Historical inflation is now almost on par with current short term rates but the central bank has said inflation will ease in the first quarter.
The three month Treasury boll yield fell 1.02 basis points from 8.80 percent to 7.78 percent in the secondary market on average according to central bank data, while the 12-month yield fell 1.29 basis points to 8.99 percent.
A 2-year bond maturing on 15 November 2018 was quoted at a yield of 11.56 percent in the last week of December 2016 (94.12 rupees0. A 01 November 2019 bond was quoted at a buying yield of 9.31 percent in late December according to central bank data (97.49 rupees) indicating a fall of 205 basis points.
The 15 November 2018 bond, now 11 months to maturity was quoted at 99.16 rupee up 3.04.
The 5-year yield fell from 12.20 percent (90.22 rupees) for a 15 October 2021 bond in 2016 to 9.85 percent (100.02) for a 01 Oct 2022 bond in 2017, plunging 235 basis points.
The holder of 15 October 2021 could sell the bond at 98.75 rupees, up 8.53 rupees. The 10-year yield fell from 12.37 percent (94.13 rupees) measured by a 01 August 2026 bond in 2016 to 10.23 percent for a 15 December 2027 bond (100.29 rupees), showing a fall of 2.34 percent.
A holder of a 01 August 2016 bond could have sold it at 106.29 rupees according to central bank data up 10.23 rupees.
The central bank expects market rates to translate to lending rates, but it has not cut policy rates. Unlike in some earlier crisis where there was a fast recovery such as in 2001 and 2009, the central bank has not allowed the exchange rate to appreciate. (Colombo/Jan02/2018)