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Atchuthan Srirangan, Assistant Manager – Research at First Capital Holdings, with the Market Review on Ada Derana – 15.07.2018

Stock Markets Sri lanka

First Capital’s Atchuthan Srirangan with the Market Review on Ada Derana

The comments on this report are provided by the Capital Markets Research Unit of First Capital Holdings PLC an investment bank in Sri Lanka.

The company operates in the capital markets of Sri Lanka in government securities – treasury bills and bonds, stock brokering and share market investments, asset management, private wealth management, retirement planning, personal financial planning, unit trust, margin trading, capital market research, trustee services, corporate finance advisory services including corporate debt structuring (debentures, trust certificates, commercial papers), valuations, restructuring, mergers and acquisitions, initial public offerings (IPOs) and project advisory.

The First Capital Group consists of First Capital Treasuries PLC, First Capital Limited, First Capital Markets Limited, First Capital Asset Management Limited and First Capital Equities (Private) Limited covering Colombo, Negombo, Matara, Kandy and Kurunegala.

First Capital is an investment bank offering services as Stock Brokers in Sri Lanka. The Company acts as a conduit between retail and institutional clients and the secondary market of the Colombo Stock Exchange. First Capital’s best-in-class research team provide a series of actionable trade recommendations, daily and periodic market commentaries and publications for Stock Brokers in Sri Lanka.

Fundamentals strengthening, growth remains key – First Capital Research

Daily Mirror | 16.07.2018

Recap of recommendations of January 2018 and review of 1H2018

First Capital Research expected the yield curve to be upward trending 1Q-3Q2018 with an acceleration in the uptrend towards 3Q amidst bunching of debt maturities during 3Q2018.

The unexpected election results in Feb, saw an early surge in yields across the curve in Mar 2018 with lower investor confidence levels. Following the USD 2.5Bn sovereign bond some stability was seen during Apr 2018. However, business confidence dropped to a 70-month low in Apr 2018.

Investor confidence affected by political uncertainty

More elections on the cards: upcoming Provincial Council elections and Presidential polls are likely to be major deterrents for mid to long term investments as investors would be concerned about long term policy consistency.

Economic outlook to slowly improve

GDP growth for 2018E downgraded to 4.5%: 1Q2018 GDP growth of 3.2% was below expectations. Similarly, 2Q is also likely to be slow amidst business confidence levels falling to a 70-month low. However, we expect a gradual pickup in business activity and consumer demand during 2H2018 with an accelerated GDP growth towards 4Q2018. First Capital Research downgraded 2018E GDP growth to 4.5% (previous 5.1%) but remains positive on uptick in growth specifically during 2H2018. A further acceleration is expected in 2019E with a GDP growth target of 5.0%.

Foreign Reserves jumps back up, but so does imports: The USD 2.5Bn Sovereign Bond resulted in reserves convalescing to USD 9.2Bn by Jun 2018. Despite large outflows, final payment of USD 0.5Bn for Hambantota Port deal and syndicated loan of USD 1.0Bn are likely to assist reserves to remain above USD 9.0Bn by end 2018. However, growing imports resulted in an increased minimum reserve amount required (4 months of imports) to USD 8.0Bn. Further foreign reserve accumulation need to continue amidst the continuous rise in foreign debt payments (large sovereign bond repayment 1Q & 2Q 2019) & BoT deficit.

Debt repayment cover improves: Rise in Foreign Reserves further lowered the foreign currency debt repayment cover to 1.3x of Foreign Reserves. The strengthening of reserves improved the foreign currency repayment cover at a time, when the next 12 months is having the highest level of foreign debt payments before overall debt levels start to ease off.

High level of maturities coming up in 3Q2018 and 1Q2019

Beyond 1H2019 overall debt payments to ease off with less bunching off of debt while debt to GDP levels are likely to be on a downtrend: CBSL has so far been successful in rolling over most of the debt and spreading them over a period to prevent any bunching of debt in the future and also reducing the cost of debt at the same time. We expect Debt to GDP to reduce to 76.5% in 2018E while any SoE selloffs (such as Hyatt or Hilton) and PPPs for Mattala Airport works off the ratio is likely further dip below 76.0%.

Liquidity may improve towards 4Q: In line with our expectations in Jan 2018 through “First Capital Strategy Report 2018”, we experience a liquidity shortage towards 3Q and ease off towards 4Q2018, but low level of liquidity of LKR 20-50Bn is likely during 1H2019.

Higher base effect in 2017 may result in low point to point inflation in 2H2018: Due to higher base effect, point to point Inflation may illustrate a drastic reduction from Oct 2018 – Jan 2019 amidst heavy food shortages witnessed last year. Overall the index is expected to be between 3.2%-6.6% during the next 12 months. The average annual rate for 2018E is likely to be 4.0% while it’s expected to increase to 5.3% in 2019E

Credit to remain steady at 15%: First Capital Research expects private sector credit growth to pick up towards 2H2018 signifying a steady growth of 15% while a moderate 16% in 2019E.

External environment

Global Growth and South Asia Growth is positive: IMF upgraded its Global growth forecast in Jan 2018 to 3.9% for 2018 & 2019. Emerging and developing Asia will grow strongly at around 6.5% over 2018–19, broadly at the same pace as in 2017.

Funds flows are towards US is negative for Sri Lanka: Higher growth across the world is likely to create significant competition for capital and investments which is negative for Sri Lanka. Further the rising global yields supported by further Fed rate hikes have resulted in global funds flowing towards the US.

Overall impact is Neutral: Despite rising global yields the improving macro conditions neutralizes the overall outlook for Sri Lanka unless reform agenda is reversed.

First Capital recommendations Bond market: Bullish

We expect the yield curve in Government securities to peak during 3Q2018, followed by a slow downtrend. Thereby, from bearishness at the start of 2018, we are now bullish on bonds beyond 3Q2018. We believe 1Y, 5Y & 10Y trade within the bands of 9.0%-10.0%, 10.0%-11.0% & 10.5%-11.5%.

Banking rates: AWPLR may decline to 10.0%

Banking rates which has a 6-month lag effect to 5 Year Bond is likely experience less volatility over the next 12 months while a further slow dip in AWPLR to 10.0% is expected. In a more broader sense during the next 12 months (Jul 2018-Jun 2019), we expect AWPLR to broadly stay within the band of 10.0% – 11.0%.

Exchange rate: 2018E Exchange Rate target downgraded to LKR161.0 while 2Q2019E is likely to reach LKR164.5

With 4 fed rate hikes on the cards over next 12 months, a stronger dollar is more likely, thereby we downgrade our exchange rate target from Rs. 159 to Rs. 161 : 1USD for end 2018 and target Rs. 164.5 : 1USD over next 12 months upto Jun 2019. Dollar index is expected to remain strong over the next 12 months while with continued reforms inflows into Sri Lanka debt and equity capital markets are likely with the attractive yields. Further Sri Lanka moves into the peak season of exports Sep-Mar. We expect more stability in the rupee in 2H2018, but downgrade our target to LKR161.

Equity Market: Bullish

We expect market returns to be stronger despite slower earnings growth outlook of 5-7%. Healthy valuations may warrant a rerating of the market providing returns of 13% market return over the next 6 months while targeting 15% return for 2019E supported by accelerating earnings growth to 10-12%

Business confidence and consumer demand to normalise in 2H2018

With stable interest rates and low inflation, we expect the stability of the economy to further improve during 2018. The stable environment is expected to slowly improve business confidence and consumer demand towards 2H2018.

We believe business confidence and consumer demand are currently below average and they are expected to normalize during the period. However, the prevailing policy uncertainty created through the political uncertainty is a major deterrent which may slow down the gradual improvement.

Political uncertainty seen dampening investor confidence

Economy Next – 16.07.2018

By First Capital Research

ECONOMYNEXT – Although economic fundamentals are improving with low inflation, stable interest rates and improving demand in overseas markets, political uncertainty in the run-up to elections may dampen investor confidence, First Capital Holdings said.

Economic growth is expected to pick up in the third and fourth quarters of 2018 and to accelerate further in 2019, they said in a research report.

“Stronger macro fundamentals, higher investments and pickup in consumer demand is likely to increase growth in 2019E to 5.0%,” the company’s mid-year economic outlook said.

“ Potential election in 2019 may also push authorities accelerate relaxation of para tariffs which may also support stronger consumer demand,” it said.

“With stable interest rates and low inflation, we expect the stability of the economy to further improve during 2018,” the research report said.

“The stable environment is expected to slowly improve business confidence and consumer demand towards 2H2018. We believe business confidence and consumer demand are currently below average and they are expected to normalize during the period.”

However, First Capital Holdings warned that the prevailing policy uncertainty is a major deterrent which may slow down the gradual improvement.

Following the local government elections, all eyes are on polls for Provincial Councils whose terms are in the process of expiring later this year and early next.

“A further defeat for the present government may worsen the prevailing political uncertainty. But an improvement in the voter base may provide some respite,” First Capital Holdings said.

Another major factor that is creating uncertainty is the forthcoming Presidential election in late 2019.

“None of the three major political parties have announced a clear candidate who would be contesting for the upcoming elections,” First Capital Holdings said.

“It is a major deterrent for any investor. It is an important step in forecasting possible policy direction for the future in order to assess the risk for long term investments.”

The research report noted that the government’s debt repayment pressure is easing with the central bank very successful in rolling over most of the debt at lower rates and spreading them over a period to prevent any bunching of debt in the future.

It also noted that economic growth in key markets in the US and Europe is reviving and that export growth momentum has been picking up over the last few months.
(COLOMBO, July 12, 2018)

First Capital downgrades exchange rate target to 161 rupees for end 2018

July 11, 2018 (LBO) – First Capital Research said they downgraded their exchange rate target from 159 rupees to 161 rupees per dollar for end 2018 since a stronger dollar is more likely in the coming months.

With four fed rate hikes on the cards over next 12 months, First Capital Research said they are targeting an exchange rate of 164.5 rupees per dollar over the next 12 months up to June 2019.

“Dollar index is expected to remain strong over the next 12 months while with continued reforms inflows into Sri Lanka debt and equity capital markets are likely with the attractive yields,” First Capital Research said

“Further Sri Lanka moves into the peak season of exports Sep-Mar. We expect more stability in the rupee in 2H2018, but downgrade our target to LKR161.”

First Capital expects the yield curve in government securities to peak during the third quarter of 2018 and registers a slow downtrend.

“Despite having some pressure in 1Q2019 it is not expected to be as high as 3Q2018, thereby, from bearishness at the start of 2018, we are now bullish on bonds beyond 3Q2018,”

“We believe 1Y, 5Y & 10Y trade within the bands of 9.0%-10.0%, 10.0%-11.0% & 10.5%-11.5%.”

First Capital, however, said that any breakaway from reform program (Deviations affecting IMF program) or political deadlock may result in breaking the upper bands of the tenors.

First Capital also expects market returns to be stronger despite slower earnings growth outlook of 5 to 7 percent.

“Healthy valuations may warrant a re-rating of the market providing returns of 13% market return over the next 6 months while targeting 15% return for 2019E supported by accelerating earnings growth to 10-12%.”

Sri Lankan shares hit 1-1/2-week closing high; banking stocks lead

DIMANTHA MATHEW, HEAD OF RESEARCH AT FIRST CAPITAL HOLDINGS PLC, SPEAKS TO REUTERS

JULY 13, 2018

COLOMBO, July 12 (Reuters) – Sri Lankan shares hit their highest close in over a week on Thursday as investors bought banking and beverage shares, stockbrokers said.

Many market participants remained on the sidelines due to a lack of bullish news amid concerns over political uncertainty, analysts said.

The Colombo stock index ended 0.43 percent higher at 6,118.80, its highest close since July 2.

“We see local investors returning to the market as the prices are attractive to them,” said Dimantha Mathew, head of research, First Capital Holdings.

“Though the foreign selling is there, it has slowed down a bit and we expect the foreign outflows to continue for a few more weeks due to the global situation.”

Turnover stood at 586 million rupees ($3.68 million), less than this year’s daily average of 902.7 million rupees.

The index on July 4 hit its lowest close since March 30, 2017, and has declined for 19 session in 25 through Thursday.

It dropped 1.4 percent last week, sliding for a seventh straight week.

Lower economic growth outlook has also hit sentiment after the central bank cut its estimate, analysts said.

Economic growth in 2018 is likely to be between 4 percent and 4.5 percent, falling short of an earlier estimate of 5 percent, Central Bank Governor Indrajit Coomaraswamy told reporters on Friday, adding that the earlier estimate was “ambitious”.

Foreign investor are selling and concerns about lower economic growth weighed on sentiment, analysts said.

They net sold equities worth 116.3 million rupees on Thursday extending the year-to-date net foreign sale to 2.4 billion rupees.

Shares in Ceylon Tobacco Company Plc ended 1.7 percent higher, while Hatton National Bank Plc ended 1.3 percent up and Commercial Bank of Ceylon Plc closed 0.9 percent higher.

Investors are waiting for some positive news both on the economic and political front, said analysts, adding that the government’s policy implementation had been sluggish since both main parties in the ruling coalition lost local polls in February.

The International Monetary Fund said on June 20 that Sri Lanka’s economy remained vulnerable to adverse shocks because of sizable public debt and large refinancing needs.

First Capital recommendations Bond market: Bullish

Daily FT – 12.07.2018

Share Market Sri Lanka

We expect the yield curve in Government securities to peak during 3Q in 2018, and register a slow downtrend. Despite having some pressure in 1Q2019 it is not expected to be as high as 3Q2018. Thereby, from bearishness at the start of 2018, we are now bullish on bonds beyond 3Q2018. We believe 1Y, 5Y and 10Y trade within the bands of 9.0%-10.0%, 10.0%-11.0% & 10.5%-11.5%. However, it should also be noted that any breakaway from reform program (deviations affecting IMF program) or political deadlock may result in breaking the upper bands of the tenors.

Prevailing political uncertainty to affect investor confidence: First Capital Research

Lanka Business Online | 11.07.2018

Share Market Sri Lanka

July 11, 2018 (LBO) – Prevailing policy uncertainty created through the political uncertainty is a major deterrent which may slow down the gradual improvement of the economy and business confidence, a recent research showed.

First Capital Research in its mid-year economic outlook said a major factor that is creating uncertainty in the upcoming Presidential Election in late 2019.

“None of the 3 major political parties have announced a clear candidate who would be contesting for the upcoming elections,” the report highlighted.

“It is a major deterrent for any investor. It is an important step in forecasting possible policy direction for the future in order to assess the risk for long-term investments.”

Following the local government elections, all eyes are now on the Provincial Councils which are in the process of expiring.

Sabaragamuwa, North Central, and Eastern PCs expired in 2017. Central, North Western, and Northern PCs terms will expire in October. Southern, Western and Uva PCs terms will expire on April and October in 2019.

With the new electoral system to be finalized for PCs, Elections Commissioner has not called for nominations as yet.

“A further defeat for the present Government may worsen the prevailing political uncertainty,” the report said.

“But an improvement in the voter base may provide some respite.”

The unexpected local polls victory by the opposition resulted in an early surge in yields across the yield curve in March 2018 with a low level of investor confidence.

Following the 2.5 billion dollars sovereign bond, some stability was seen during April 2018 even though business confidence dropped to a 70-month low in April 2018.

Contrary to the prevailing uptrend in yields, compared to other tenors, the shorter tenors registered a continuous dip in yields with investors expecting a further rise in the overall yield curve.

First Capital Research, however, said with stable interest rates and low inflation, they expect the stability of the economy to further improve during 2018.

“The stable environment is expected to slowly improve business confidence and consumer demand towards 2H2018,” the report added.

“We believe business confidence and consumer demand are currently below average and they are expected to normalize during the period.”

Sri Lankan shares end steady; turnover at near 3-month low

DIMANTHA MATHEW, HEAD OF RESEARCH AT FIRST CAPITAL HOLDINGS PLC, SPEAKS TO REUTERS

JULY 11, 2018

COLOMBO, July 10 (Reuters) – Sri Lankan shares closed steady on Tuesday, while the turnover slumped to a near three-month low as many investors remained on the sidelines due to a lack of bullish news amid concerns over political uncertainty, stockbrokers said.

Turnover stood at 142.7 million rupees ($896,357), its lowest since April 16, and less than a sixth of this year’s daily average of 909 million rupees.

The Colombo stock index ended flat at 6,077.37, hardly changed from Monday’s close.

“All this is due to the political uncertainty and no catalysts to move the market,” said Dimantha Mathew, head of research, First Capital Holdings.

“However, the good news is that lower turnover levels mean the sellers are not desperate to sell and the market is likely to recover soon.”

The index hit its lowest close since March 30, 2017, on Wednesday and has declined for a 19th session in 22 through Monday. It dropped 1.4 percent for the week, sliding for a seventh straight week.

Lower economic growth outlook has also hit sentiment after the central bank cut its estimate, analysts said.

Economic growth in 2018 is likely to be between 4 percent and 4.5 percent, falling short of an earlier estimate of 5 percent, Central Bank Governor Indrajit Coomaraswamy told reporters on Friday, adding that the earlier estimate was “ambitious”.

Foreign investor are selling and concerns about lower economic growth weighed on sentiment, analysts said.

They net bought equities worth 1.7 million rupees on Tuesday, but the bourse has seen an year-to-date foreign outflow of 2.25 billion rupees.

Gains led by Ceylon Tobacco Co, which closed 0.6 percent firmer, were offset by losses in Softlogic Holdings , which ended 3.4 percent lower.

Investors are waiting for some positive news both on the economic and political fronts, said analysts, adding that the government’s policy implementation had been sluggish since both main parties in the ruling coalition lost local polls in February.

The International Monetary Fund (IMF) said on June 20 that Sri Lanka’s economy remained vulnerable to adverse shocks because of sizable public debt and large refinancing needs.

Bloomberg Comment – 09-07-2018

LKR Yields Seen Rising Ahead of Bond Issuance: Inside Sri Lanka
2018-07-09 04:45:31.873 GMT
By Anusha Ondaatjie

(Bloomberg) — Sri Lankan bond yields may come under upward pressure ahead of a bond issuance later this month.

* “The shorter end of the yield curve could move up in very thin volumes, as the market holds back to see the rates on the upcoming bond auction,” says Dimantha Mathew, head of research at First Capital in Colombo

* NOTE: Sri Lanka plans to issue 80b rupees ($503m) of 8- year and 15-year bonds in July, according to the central bank website

* Yield on 10.75% govt bonds due March 2021 rose 6bps on Friday to 10.05%, according to data compiled by Bloomberg

* USD/LKR rose 0.6% to 159.20 last week, the most since five days ended April 27 and snapping two previous weeks of decline

* Overseas investors sold a net $1m of local stocks on Friday, taking outflows for this month to $5.7m: exchange data

CB stands pat, says low rates will support growth

Daily Mirror | 07.07.2018

The Central Bank left its key policy rates unchanged as expected yesterday, saying a low rates environment and stabilizing inflation will support an economy in the face of a fragile rupee currency.
Political uncertainty stoked by the ruling coalition’s loss in local polls in February has cast a shadow on Sri Lanka’s economy, which slowed to a 16-year low of 3.3 percent in 2017, prompting an unexpected rate cut in April. Growth is under more pressure as rising U.S.

 

interest rates have seen foreigners pull out funds from emerging markets. The Central Bank said in a statement its monetary board’s decision is “consistent with stabilising inflation at mid-single digit levels in the medium term, thereby contributing to a favourable growth outlook for the Sri Lankan economy.”

 
“The sustained recovery in the global economy is likely to support domestic economic growth, while the prevalence of a low inflation environment and an appropriately valued flexible exchange rate are also expected to facilitate higher growth.”

 
The Central Bank left the Standing Lending Facility Rate (SLFR) at 8.50 percent and Standing Deposit Facility Rate (SDFR) at 7.25 percent.

 

The market had expected both rates to be kept steady.
Government officials have forecast economic growth of around 4.5 percent this year, less than the Central Bank’s projection of around 5 percent.

 
“At this moment the Central Bank can’t do anything,” said Dimantha Mathew, head of research, First Capital Holdings.
“The economy is too slow, so the rates needed to be cut. But the foreign outflow from the government securities is high, so you can’t cut the rates.”

 
The Central Bank unexpectedly cut its key lending rate by 25 basis points in April to support the economy, but policymakers must also defend a fragile rupee as the Federal Reserve’s rate increases draw funds from emerging markets toward dollar-denominated assets.

 

The spot rupee hit an all-time low of 160.17 per dollar on June 20 and is down 3.6 percent so far this year, after falling 2.5 percent last year. Currency dealers expect around a 6 percent fall this year.
“Much of this depreciation was recorded since late April, reflecting the broad based strengthening of the US dollar in the international market,” the Central Bank said, adding that it intervened to address speculative behaviour and unwarranted volatility.
Since April 18, Sri Lanka has seen Rs.28.7 billion (US$181.3 million) of foreign outflows from government securities, Central Bank data showed.
The previous rate increases along with tight fiscal measures to meet conditions imposed by the International Monetary Fund for a US$1.5 billion loan have dragged on the economy.