Register Online
Online Portal

Weekly Government Securities Market – 04-01-2019

By First Capital Research
Weekly Yield movement & Volume

The secondary market yield curve was relatively stable; however during the latter part of the week, the yield curve was seen shifting slightly downwards across the board due to buying interest seen in the market.

Continued depreciation in currency was witnessed, recording the lowest on 28 December at Rs 183.00. However, it has currently settled at Rs 182.85.

At the primary bill auction held on 2 January, yields of the six-month and one-year bills were accepted at 9.95% and 10.99% respectively, slightly below previous levels. The one-year bill recorded a steep dip, falling below the psychological level of 11% for the first time in seven weeks (excluding the cancelled bill auction last week (26.12.18)).


Liquidity & CBSL Holdings

CBSL market liquidity remained negative throughout the week, while widening the liquidity gap and recording the lowest liquidity for the week on 31 December, amounting to Rs 148.4 billion. CBSL holdings kept fluctuating through the week, recording the highest on 26 December amounting to Rs 272.8 billion.


Foreign Interest

Foreign holding was recorded at Rs 164.5 billion, recording a drop of Rs 10.9 billion. Overall Government Securities marginally increased by Rs 202.1 billion, while foreign holding percentage for the week declined to 3.1% from its previous level of 3.5%.


Maturities for next Week

The Government Securities Market has a Treasury bill maturity amounting to Rs 19.5 billion to be settled on the week ending 11 January.


Daily Summary

Thursday (27.12.18): In the midst of continuous foreign selling, short tenor maturity [15.12.21] changed hands at intraday high of 11.60% levels, while mid tenor maturities [15.05.23] traded at 11.70% levels and [01.08.25] traded at intraday high of 11.85% levels. The overall market witnessed moderate volumes as market participants remained on the sidelines.
Friday (28.12.18): The secondary market yield curve remained broadly steady, while the overall market witnessed moderate volumes. On the back of buying interest that stemmed from local counterparties, mid to long tenure maturities, reached intraday lows with mid tenure maturities [15.12.21] trading at 11.51%, two 2023 maturities [15.05.23] and [15.07.23] at 11.65% and 11.68% respectively, while long tenure maturities, [01.08.26] traded at 11.77% and [15.06.27] at 11.78%.
Monday (31.12.18): The overall yield curve closed for the year, remaining unchanged at previous week’s closing levels, while the market witnessed thin volumes as market participants were seen remaining on the sideline. Limited activity was witnessed on [15.12.21] at 11.55%, [15.07.23] at 11.70% and [15.06.27] at 11.80%.
Wednesday (02.01.19): The market witnessed continued buying interest, with the yield curve witnessed a downward shift across all maturities amidst moderate volumes. Following maturities traded at their intraday lows; [01.05.20] at 11.00%, [01.03.21] at 11.25%, [01.08.21] at 11.33%, [15.12.21] at 11.25%, [15.05.23] at 11.55%, [15.03.25] at 11.58%, [01.08.26] at 11.55% and [15.06.27] at 11.62%. At the primary bill auction held on 02 January 2019, the six-month and one-year bills were accepted at 9.95% and 10.99% respectively, while the three-month was not offered.

First Capital “cautiously bullish” on listed stocks

Published on Daily FT on 02 January 2018

Stock Market Investment in Sri Lanka

First Capital Research is “cautiously bullish” over the prospects of investments into listed stocks in 2019 though the Colombo Bourse experienced a 5% dip last year.

In its latest equity strategy report, First Capital said that it was positive on equities hence recommending “buy” but reduce “cash exposure.”

As per the strategy done by analysts Dimantha Mathew, though political uncertainty has settled the battle for policy certainty may continue. It also said that external sector has turned positive favouring the Asian region.

Noting that stock markets usually pass through many phases, First Capital said it rarely reaches fair value and as a result markets either overshoot or over-correct.

“The ASPI we believe has over-corrected and is currently passing through a depression phase and potentially on its way to disbelief stage,” First Capital said.

“Valuations suggest to be attractive relative to CSE’s peer countries, strongly suggesting a healthy range of undervalued stocks,” it added. Most banks, which account for 40% of the equity market, are trading below their book value.

“When the market enters such a phase, it would be a matter of time before an unforeseen event or best known as a black swan even may lead to the market cycle to get converted to phase of “Hope”, which begins a strong bull run,” First Capital Research opined.

It also said that over the past three months (25 September to 24 December 2018), First Capital maintained exposure at 50%, considering earnings hit via depreciation and political unrest affecting sentiment of the market. However during the period the market gained by about 100-120 index points.

“As we step into 2019, we are witnessing the global fund flow reversing towards Asia and commodity prices crashing, with the dip in oil prices benefitting the Balance of Payments position of Sri Lanka and positively affecting Cost of Living,” First Capital said.

“We believe the events that have unfolded may benefit Sri Lanka and the equity market over the next few months, positively impacting earnings and possibly leading to net foreign inflows,” it said. “In view of this outlook, First Capital Research has upgraded its equity exposure to 60% from 50% previously and upgraded ASPI volatility expectations to 6,000-6,500 (from the previous 5,800-6,200) assuming Market Price Earnings Ratio to be 8.5x-9.5x.

In its equity strategy report, First Capital also said that following the re-appointment of “pre-October 26 Government” and passing of the Vote of Account in Parliament, the political uncertainty that prevailed eased off providing financial capability for the Government and its institutions to function beyond 31 December 2018.

“However stability created, is likely to be temporary, as suggested by the differences that were prevalent in the process of appointing the new Cabinet. We expect the divergent views between the President and UNF Government will continue to affect key policy decisions within the Cabinet throughout 2019, up until the Presidential elections due in January 2020,” it added.

In terms of external sector turning positive for Asia, First Capital said that global growth is expected to slow down during 2019, primarily led by the possible impacts arising out of the trade war between the US and China coupled with the downgrade in growth expected in the US economy. The slowdown in the US economy is also likely to result in decelerating the Federal Reserves’ interest rate normalisation process, which may provide some breathing space for most weaker Asian economies. “Global fund flow has already started to reverse towards Asia and emerging markets providing reasonable level of stability to Asian and other emerging markets,” First Capital Research noted.

Increase equity exposure to 60% – Report

One of Sri Lanka’s leading investment banks – First Capital Holdings’ research arm First Capital Research in an ‘Equity Strategy’ report points out that increase in equity exposure from 50% to 60% is favourable amidst an upgrade of All Share Price Index (ASPI) volatility expectations to 6,000-6,500 (up from their previous prediction of 5,800 – 6,200 levels), assuming Market PER (Price to Earnings Ratio) to be 8.5 times – 9.5 times.

“Over the last 3 months from 25th September to 24th December we’ve maintained exposure at 50% considering earnings hit via depreciation and political unrest affecting sentiment of the market” report points out adding that however, during the period market gained by about 100-120 index points.

“As we step into 2019, we are witnessing the global fund flow reversing towards Asia and commodity prices crashing with the dip in oil prices benefiting the BoP position of Sri Lanka and positively affecting Cost of Living” report highlights adding that analysts believe the events that have unfolded may benefit Sri Lanka and the equity market over the next few months positively impacting earnings and possibly leading to net foreign inflows.

“Thereby, we upgrade our equity exposure to 60%” report added.

The report notes that political uncertainty is to settle whilst battle for policy certainty may continue.

“Buy into equities; reduce cash exposure” company’s analyst Dimantha Mathew highlights adding that following the re-appointment of “pre-October 26th Government” and passing of the Vote of Account in Parliament, the political uncertainty that prevailed over the last 8 weeks eased off, providing financial capability for the Government & its institutions to function beyond 31st Dec 2018.

“However, stability created, is likely to be temporary, as suggested by the differences that were prevalent in the process of appointing the new cabinet” the report adds in it is review.

“We expect the divergent views between the President and UNF Government to continue to affect key policy decisions within the cabinet throughout 2019, up until the Presidential elections due in Jan 2020” analyst Dimantha Mathew points out in his report.

Report notes that Global growth is expected to slow down during 2019 primarily led by the possible impacts arising out of the trade war between the US and China coupled with the downgrade in growth expected in the US economy. The slowdown in the US economy is also likely to result in decelerating the Federal Reserve’s interest rate normalization process which may provide some breathing space for most weaker Asian economies. Global fund flow has already started to reverse towards Asia and emerging markets providing reasonable level of stability to Asian and other Emerging Markets.

Sri Lanka stocks fall 5-pct in 2018, outperforms major markets

Economy Next – 31.12.2018

ECONOMYNEXT- Sri Lanka’s stocks have fallen 5 percent over 2018, outperforming major markets in the world which were battered amid Donald Trump’s economic nationalism and Federal Reserve rate hikes.

The Colombo All Share Price Index (ASPI) fell 316 points to 6,052.37 at end of trading on December 31, from 6,369.26  at the last day of trading in 2017 while market capitalization fell by 60 billion rupees to 2.84 trillion rupees , based on stock exchange data.

The index peak of 6,598.73  was reached on February 21, a week after the provincial council elections which strongman Former President Mahinda Rajapaksa won.

The stock market then tumbled gradually to an annual low of 5761.09  on October 19 before recovering to 6,092.21 on November 2, when President Maithripala Sirisena staged an unsuccessful coup against his coalition partner Prime Minister Ranil Wickremesinghe by attempting to replace him with Rajapaksa.

However, foreign sales of Sri Lankan stocks mirrored a regional trend, where investors sold out.

In the US the Dow Jones Index was also down 6.7 percent by December 28, with Trump raising import duties, disrupting trade while the Federal Reserve also raised rates, ending years of loose policy.

China’s Shanghai Composite Index was down 24.59 percent and Japan’s Nikei was down 12.08 percent, data from Bloomberg Newswires showed.

Colombo-based First Capital Research said it expected foreign investors to return to Sri Lanka in 2019.

“As we step into 2019, we are witnessing the global fund flow reversing towards Asia,” the brokerage said in a research note.

First Capital Research said that the ASPI could be expected to fluctuate between 6,000-6,500 in 2019, upgrading the firm’s past projection from 5,800-6,200.

However, it said that political stability created after the ending of the constitutional crisis is temporary and differences between the president and the Wickremesinghe’s United National Front will show in policy making.

Sri Lanka’s central bank which operates a soft-pegged exchange rate has also generated balance of payments pressure by injecting liquidity and defending the currency, which has panicked bond investors.

The rupee depreciated to 183 against the dollar in spot currency markets on December 31, 2018, down 19.7 percent from 152.85 on December 28, 2017. (Colombo/Dec31/2018)