Sri Lankan stocks seen offering opportunities despite risks
ECONOMYNEXT – Sri Lanka’s stock market offer “pockets of opportunities” for investors despite risks generated by local political and economic conditions, Asia Securities stock brokers said in its 2019 equity market outlook.
The stock brokerage firm is recommending that clients take positions in stocks with specific growth opportunities in the current environment.
“Asia Securities Research expects the Sri Lankan stock market to offer pockets of opportunities for investors, in the year ahead, despite expectations that 2019 will in general be a challenging year for equities,” the report said.
It noted that the Colombo Stock Exchange’s All Share Price Index (ASPI) currently trades at 8.5x trailing price-to-earnings (P/E) multiple, down from 10.1x at the beginning of 2018.
“Furthermore, the ASPI is trading at a 20% discount to the overall MSCI Emerging Markets (EM) index, which is the largest discount seen in the last five years,” Asia Securities said.
The local “idiosyncratic risks” – largely political and to some extent macroeconomic – led to 9.6 billion rupees (about 50 million US dollars) of foreign fund outflows from the stock market compared to 28.5 billion rupees in inflows in 2017 resulting in the dip in valuations.
Although the outlook for emerging markets has improved, the report said it is likely that Sri Lanka will not see a significant benefit from this trend in the short run, as the local conditions will keep foreign investors on the sidelines.
The main risks include delayed budget reading that creates uncertainty about fiscal measures, and debt maturities of 5.9 billion dollars exacerbated by credit rating downgrade and the resultant pick up in refinance costs.
The uneasy alliance between President Maithripala Sirisena and the government led by Ranil Wickremesinghe, raising concerns on continuing policy divergence, is also among he largest residual risks factored in by investors.
Sirisena triggered a political crisis, and credit rating downgrades, late last year when he sacked Wickremesinghe and replaced him with former president Mahinda Rajapaksa, a decision overturned by Sri Lanka’s supreme court.
Asia Securities said that, given the current high interest rate environment, local high net worth and retail investors may favor fixed income assets and take a wait-and-see approach toward equities.
But they said the market is expected to pick up in the second half of the year as macro-economic conditions improve.
These include re-engaging with funding partners such as the IMF and making progress on other funding lines currently in the pipeline while managing the 1.5 billion dollar sovereign bond repayments in January and April.
Presenting the budget with streamlined fiscal policy, while continuing the reforms agenda, are key development eagerly watched by investors, Asia Securities said.
It also expects a pickup in agriculture and related household income, to translate to better consumer demand, while continued low oil prices and better hydro power generation lead to an improved current account balance. Lower currency depreciation should also strengthen reserves.