by First Capital Research
“Tough Conditions, but Cautiously Optimistic 2018”
We expect the yield curve in Government securities to have upward pressure in 2Q & 3Q in 2018, but First Capital Research has reduced the expected peaks in bond rates (1Yr, 5Yr & 10Yr) amidst the sharp rise in the health of the economic indicators towards 4Q2017. We expect the yield curve to marginally ease off again towards the 4Q2018, but not too much considering 1Q & 2Q 2019 maturities including maturities of 2 sovereign bonds
Banking rates which has a 6-monthh lag effect to Government securities are likely experience a dip in deposit and lending rates during the 1Q2018 while maintaining less volatile movements for the rest of the year with only marginal movements.
With further depreciation in the Dollar expected against global currencies and a higher level of foreign inflows including FDIs, our base case (65%) is slightly bullish with depreciation expected at only 2% at LKR 156 : 1 USD.
We expect Market returns to be slow but generate returns of 10%-12%, above the expected earnings performance as some counters are likely to re-rate with expected better earnings outlook in the future. ASPI index is expected to reach 7000 (+10% or +650 points) towards the end of 2018. Market returns are likely to accelerate towards 2019 to reach 8000 level (+15% or +1000 points) with the actual earnings performance and renewed investor confidence. These targets, however, are highly dependent on the current stable outlook and reform agenda continuing during 2018 as well.
Business Confidence & Consumer Demand
We expect business confidence and consumer demand to improve from 3Q2018 onwards improving overall business activity of the economy