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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.