June 22, 2016 (LBO) – Sri Lanka’s equity market offers opportunities for value investors as market multiples have contracted, JB Securities says in their latest research report.
Although the economy is forecast to grow 4.5 percent in 2016, compared with 4.8 percent last year, further increases in interest rates are likely limited to 25 basis points. Inflation too should stay within tolerable limits of 4 percent to 6 percent, the top securities firm adds.
“Market multiples have significantly contracted, quality counters that were trading at rich valuations have corrected offering quality at a fair price. Value investors can find attractively priced blue chip counters,” the Outlook for Equities report said.
Nevertheless, rising interest rates are unfavorable for equities. At the margin most retails investors will select fixed income instruments than equities to invest in, the report added.
“A rate hike larger than 25bps will likely not happen as headline inflation will remain within the Central
Bank’s tolerable range of 4 percent to 6 percent.”
Sri Lanka resorted to an IMF support facility of 1.5 billion dollars this year due to a widened budget deficit and an exit of capital from the government securities market. The IMF facility is expected to bring in discipline to government finances while making policy more predictable, JB Securities said.
“This is likely to stabilize risk sentiment which can support FII inflows in the 2H-2016,” the report said, referring to foreign investment.
“We are of the view that a further 25bps policy rate hike is still probable in 2H-2016.”
“Yields on government securities will likely come down due to inflows from FIIs reentering the market taking comfort from the ongoing IMF programme. Further, the government is hoping to go to the international markets to meet funding requirements for upcoming debt maturities thus limiting demand on domestic resources.”
The firm said they forecast USD/LKR to reach 149 by the end of the year.
“Upside risks to this view is more aggressive Fed tightening than expected, and a significant devaluation in the Chinese Yuan which would pressure on USD/LKR to move higher.”
Healthcare has been a star performer, while rising nominal interest rates are more propitious for large commercial banks with a wide retail franchise, JB Securities said.
Tourism remains a sunrise industry and the industry outlook remains favorable, although pricing power may abate due to new supply coming on stream.