Tag Archives: Capital Market Research Sri Lanka

Sri Lankan stocks reaching bottom of cycle

ECONOMY NEXT | 17.04.2019

Stock Brokers in Sri Lanka

Sri Lanka’s stock market is heading towards the bottom of a cycle, with opportunities for buying and potential recovery in the coming quarters, a research house said.

“With the recent stock market plunge, we believe that we inaccurately assessed the market to be at the depression stage during the December 2018 period,” the research arm of First Capital, an investment bank, said.

“Considering the reactions of the market participants it was evident that the ASPI was at the latter part of the “Anger” stage in the psychological cycle.”

“The positive developments experienced in the recent past, the upcoming election season, liquidity improvement and the possible rate cut are considered to be a number of possible trigger points for an upside in the market,” it said.

The investment bank said that the power struggle in parliament has died down following the passing of the budget in March and April, while the upcoming election season may boost economic activity and renew consumer demand.

“Thereby, we believe the ASPI (All Share Price Index) is likely to be entering the depression stage in the current market cycle with a considerable number of positive expectations over the next few quarters.”

First Capital said it has increased its portfolio to 80 percent equity holdings in April, from 60 percent in December, as the ASPI is expected to return to 6,000 levels in the next quarters.

In the 3 months from December 26 to April 02, the ASPI had dipped 7 percent with panic selling on the back of weak earnings, it said.

The ASPI closed around 5,591.83 on Wednesday.

First Capital Research said with a stabilizing rupee and a reform program with the International Monetary Fund back on track, foreign inflows to equity markets are expected to accelerate, amidst strong valuations.

Index-heavy stocks are attractive, it said.

“As we gradually turn bullish on stocks, we recommend investors to accelerate accumulation into blue chip counters which are trading at heavy discounts.”

“For investors who are already into equities, we believe this is an opportune period to increase exposure and average the existing portfolios.”

First Capital is an investment bank providing a full range of financial advisory and services. The Company’s research delivers a heightened perspective in fundamental research aiding Share Market Investment in Sri Lanka. The Company’s best-in-class research team provide dynamic reports including economic reviews and proprietary research, encompassing fundamental, quantitative and technical analysis. With fundamental research coverage of 62 listed securities (reflecting approximately 65% market capitalization) across 15 sectors in Share Market Investment in Sri Lanka.

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.

1-Yr T-bill records at single-digit 9.99 per cent

CEYLON TODAY | 12.04.2019

Treasury Bills and Bonds in Sri Lanka

Accelerate equity accumulation to 80 per cent exposure

CEYLON TODAY | 11.04.2019

Investment in Sri Lanka

In our last update on 26 December 2018, equity exposure was increased to 60 per cent (from 50 per cent) despite the risk associated in the economy and the weak outlook in the 1Q2019. During the three months (26 December – 2 April) the ASPI dipped by seven per cent, with panic selling among all fronts on the back of weak earnings.

However, the market has recovered over 130 points in the last six days, signaling a bottoming-out effect. We recommend increasing equity exposure upto 80 per cent reducing cash allocation from 40 per cent to 20 per cent, on the backdrop of the positive developments on the liquidity, external sector, possible rate cut and potential foreign inflows.

As we gradually turn BULLISH on stocks, we recommend investors to accelerate accumulation into blue chip counters, which are trading at heavy discounts. For investors who are already into equities, we believe this is an opportune period to increase exposure and average the existing portfolios. On a broader note, we expect market returns to be positive over the next few quarters, with the ASPI edging back towards the 6,000 mark with some resistance towards 5,800.

Government and Central Bank push banks to cut rates and lend more to SMEs

DAILY MIRROR | 05.04.2019

The government and Central Bank in lockstep are pushing the banks to cut rates and deploy more funds as loans to the micro, small and medium enterprise (MSME) sector as the authorities attempt to reinvigorate the economy, which has lost its momentum. In a hurriedly called meeting with the bank chieftains held yesterday, at the Temple Trees, Economic Reforms and Public Distribution Minister Harsha de Silva was said to have urged the banks to accelerate lending to the economy, specially to the MSMEs, Mirror Business learns.

The closed door meeting was attended by Central Bank Governor Dr. Indrajit Coomaraswamy, Finance State Minister Eran Wickramaratne, several other lawmakers and some key bureaucrats.

The banking sector officials attending the meeting, including chief executive officers, chief financial officers and other key representatives, said to have pointed out that the current political logjam and the already poor economic outlook prevented them from taking any new risks. Sri Lankan banks recorded extremely high loan impairments and a significant increase in non-performing loans (NPLs) in 2018.

Sri Lanka’s economy lost momentum since 2016 due to a combination of bad fiscal and monetary policies. The growth slowed to 3.2 percent last year, well below the economy’s potential, following the tight policies implemented since mid-2016.

The data for January showed a de-growth in private sector credit to the tune of Rs.4.2 billion and the Monetary Board in February slashed the Statutory Reserve Ratio by 100 basis points to release liquidity to the market.

The weak data would have certainly troubled the policymakers who have been taking every measure to accelerate growth, as the country is facing some crucial elections in a few months’ time, where the stakes for the ruling party remain high.

Analysts and economists blame the weak ‘animal spirits’ in the economy for the current impasse as consumers and businesses lack confidence in the system.
The consistently weak data could force the Monetary Board to relax the monetary policy next week at its second meeting for the year, to prop up the sluggish economy.

First Capital Research in a report this week said a probability of a rate cut has gone up by 40 percent after the weak fourth quarter GDP growth, which came in at a shockingly low of 1.8 percent.

They see a 50 percent chance for a cut in the Standing Lending Facility Rate by at least 25 basis points.

The fiscal policy has offered little to support the economy so far.

But the recent budget proposed multiple money deploying programmes ranging from providing funds to the newly married for housing and concessionary funding for entrepreneurs and MSMEs.

Meanwhile, the government’s flagship Enterprise Sri Lanka concessionary loan programme has already disbursed about Rs.79 billion across various sectors in little under one year since its launch, to help assist those who want state support to start a business.

First Capital Holdings PLC is an investment bank and is the pioneer non-bank affiliated Primary Dealer in Treasury Bills and Bonds in Sri Lanka. With a track record of over 25 years, the Company was the first licensed primary dealer appointed by the Central Bank, and is also the only listed and rated primary dealer in Treasury Bills and Bonds in Sri Lanka
First Capital delivers the only source for fixed income research in the local financial services industry. The Company’s best-in-class research team provide dynamic reports including economic reviews and proprietary research, encompassing fundamental, quantitative and technical analysis.

Yields continue to plunge due to positive sentiment

CEYLON TODAY | 05.04.2019

Investment bank in Sri Lanka

By First Capital Research

Weekly Yield movement and Volume

On the back of continuous foreign interest in Government Securities, coupled with positive liquidity, the secondary market witnessed a downtrend across the yield curve amidst renewed buying interest from market participants. Positive sentiment was further fuelled on the back of the Treasury bill auction outcome. At the primary bill auction, the one-year T-bill was accepted at a weighted average of 10.15 per cent (i.e.  pre-26 October levels),  while post-bill auction,  the  one year further  dipped  to  9.95-10.05 per cent levels. In the forex market, the LKR was seen continuously appreciating, with the USD/LKR rate closing at Rs 174.6 against previous week closing levels of Rs 176.2, up by 0.9 per cent WoW. Furthermore, market liquidity turned positive to record at Rs 16.6 billion after nearly six months.

Liquidity and CBSL Holdings

CBSL   market   liquidity   turned   positive   on 3 March 2019 after a lapse of nearly six months. Prior to liquidity turning positive, the liquidity deficit was widening from 26 March 2019 to 2 April 2019. Meanwhile, CBSL holdings remained broadly steady at Rs 177.6 billion.

Foreign Interest

Foreign holding increased by Rs 1.6 billion to record at Rs 167.9 billion. However, foreign holding percentage remained stable at 3.1 per cent.

Maturities for next Week

The Government Securities Market has a Treasury bill maturity, amounting to Rs 25  billion that needs to be settled on the week ending 12 April 2019.

Sri Lanka has a 50-pct chance of rate cut

ECONOMY NEXT | 05.04.2019

There is a 50 percent chance of cut in Sri Lanka’s 9.0 percent ceiling policy rate and a narrowing of a policy corridor on April 08, a financial research house has said.

“First Capital Research allocates a 50 percent probability for a policy rate cut in April 2019, as we are of the view that policy intervention is appropriate to address the overly sluggish economic growth,” the firm said in a research note.

“Keeping in line with the possible introduction of a single policy rate, we believe a rate cut, if at all, will be applicable only to Standard Lending Facility Rate.

“However, considering the negative liquidity position we allocate a further 50 percent probability for no change in rates as CBSL may consider to delay the rate cut upto the next policy meeting in May 2019.”

Sri Lanka’s central bank has already started injecting 7-day cash at around 8.50 percent by end March down from close to 9.0 percent earlier in the month.

In 2018, the central bank cut policy rates and over-issued printed money of up to 38 billion rupees in April 2018 to trigger currency pressure and monetary instability, killing a fragile recovery that started in the first quarter of 2018, analysts have said.

In January 2019 however private credit went negative from dual shocks of a currency collapse and capital flight in the previous year.

Sri Lanka has a soft-pegged exchange rate where any money printing when credit is strong generates a run on the currency, which rapidly worsens as the central bank intervenes in forex markets and prints more money to keep interest rates down.

In recent weeks amid slower credit the central bank had brought dollars and the liquidity had been swallowed up in a liquidity shortage, helping clear it. But in April real money demand expands amid the traditional New Year holiday.

In the absence of rate cut to disrupt the credit system and reckless injections, part of the festival drawdown is covered by dollars purchases from remittances and exporter firm conversions to pay festival advances.

Even so analysts have expressed caution about cutting rates in April where there is a seasonal drawdown in cash, and had said it is more prudent to cut rates in May after returning excess cash is withdrawn.

Analysts have also warned against narrowing the policy corridor, because the central bank employs several convertibility undertaking to operate the soft-peg and a wide policy corridor provides automatic protection against liquidity shocks.

Narrowing the policy corridor will allow the central bank to generate 2018 style monetary instability more easily.

Meanwhile FC Research said CBSL acted contrary to the firm’s expectations of unchanged policy stance in February, and cut the statutory reserve ratio by 100 basis points to inject liquidity into the money market.

The firm said that the SRR cut in February helped improve liquidity in money markets, and more recently, foreign inflows to the bond market, and foreign remittances ahead of the festive season are reducing the liquidity shortage.

“We expect the situation to further improve over the next few weeks.”

FC Research aid political uncertainty has reduced to some degree with the passing of the budget.

The dovish US Fed stance has seen global fund flows shift from US gilts towards emerging markets, favouring Sri Lanka, the firm said.

In addition to a forex reserve target by the International Monetary Fund, which requires an implicit strong side convertibility undertaking of the peg with the US dollar the central bank also has a real effective exchange index target.

To enforce convertibility undertakings on both sides of the peg, a wide corridor or floating policy rate is required, or the central bank has to keep the peg on the strong side by mopping up liquidity, analysts have said.

FC Research said according to Sri Lanka’s REER (real effective exchange rate, which is a weighted average of the currency against a basket of other currencies) the rupee is now undervalued. The REER value depends on the currencies in the basket and how imprudent or prudent other central banks in the basket are.

“We expect the REER to have reached 97-98 range with the rupee appreciation together with the strengthening of the dollar index in February and March 2019.

“REER for January 2019 recorded at 94.18 indicating the undervaluation of the currency.”

First Capital Holdings PLC is an investment bank and is the pioneer non-bank affiliated Primary Dealer in Treasury Bills and Bonds in Sri Lanka. With a track record of over 25 years, the Company was the first licensed primary dealer appointed by the Central Bank, and is also the only listed and rated primary dealer in Treasury Bills and Bonds in Sri Lanka
First Capital delivers the only source for fixed income research in the local financial services industry. The Company’s best-in-class research team provide dynamic reports including economic reviews and proprietary research, encompassing fundamental, quantitative and technical analysis.

Bond Prices Lifted by Lower Borrowing Costs: Inside Sri Lanka

Treasury Bills and Bonds in Sri Lanka

(Bloomberg) — Sri Lanka’s bond prices rose after the government’s cost of borrowing declined at an auction Wednesday.

* Central bank sold 4b rupees ($23m) of 91-day bills at 9.24%, down from 9.39%, 4b rupees of 182-day bills at 9.50%, down from 9.67% at previous auction, and 20b rupees of 364-day notes at 10.15% versus 10.40%

** The bank offered a total 28b rupees of bills, with 106b rupees of bids received

* “Positive liquidity and expectations of a rate cut are driving  yields down,” says Dimantha Mathew, head of research at First Capital in Colombo.

* NOTE: Central Bank of Sri Lanka to announce monetary policy decision on April 8 at 4:30 pm Colombo time

* Yield on 10.9% govt bonds due March 2024 down 9bps at 10.80%

* USD/LKR marginally changed at 174.77 after it snapped three days of declines on Wednesday

* Overseas investors bought a net $1.2m of local stocks on Wednesday, taking net inflows for the month to $3.3m: exchange data

Possible rate cut amidst sluggish economic activities

CEYLON TODAY | 03.04.2019

Treasury Bills and Bonds in Sri Lanka

By First Capital Research

Previous Pre-Policy issue; CBSL continues to support liquidity
Contrary to our expectation of unchanged policy stance, CBSL reduced the SRR by 100 bps to 5 per cent as they believed policy intervention was required to address the large and persistent liquidity deficit prevailing in the domestic money market.

Changes that took place during the period:

= Sluggish sentiment in Sri Lanka’s economy has been a major concern, with latest GDP growth for 4Q2018 recording an alarmingly low 1.8 per cent. Growth protracted in 2018 with annual GDP growth trimming to 3.2 per cent compared to 3.4 per cent in 2017.

= Supported by the SRR cut in February 2019, liquidity position saw a significant improvement. More recently, the minor level of foreign inflows and the subsequent foreign remittance conversions are having an impact on liquidity curtailing the deficit, while we expect the situation to further improve over the next few weeks.

= Political uncertainty has worn off to a certain extent with the TNA supporting the UNF Government on the passing of the Budget.

External sector strongly favouring Sri Lanka

= The Fed signaled the pausing of rate hikes in 2019, while certain analysts expect possible reversal in stance to a single rate cut in late 2019. Global fund flow, which is already shifting towards emerging markets, is likely to further strengthen and continue with the U.S. yields easing off.

= The USD:LKR continued to strengthen to close at 176.17 on 28 March 2019, supported by foreign remittance conversions and foreign inflows. We expect the REER to have reached 97-98 range with the rupee appreciation together with the strengthening of the dollar index in February and March 2019. REER for January 2019 recorded at 94.18, indicating the undervaluation of the currency.

= Resultant to the continuous foreign inflow witnessed in the secondary market since March 2019, short to belly-end of the yield curve plunged by 5-23 bps, shifting downwards, while equity market witnessed a net foreign outflow.

First Capital Research allocates a 50 per cent probability for a policy rate cut in April 2019, as we are of the view that policy intervention is appropriate to address the overly sluggish economic growth. Keeping in line with the possible introduction of a single policy rate, we believe a rate cut, if at all, will be applicable only to SLFR. However, considering the negative liquidity position, we allocate a further 50 per cent probability for no change in rates, as CBSL may consider to delay the rate cut upto the next policy meeting in May 2019.

First Capital Holdings PLC is an investment bank and is the pioneer non-bank affiliated Primary Dealer in Treasury Bills and Bonds in Sri Lanka. With a track record of over 25 years, the Company was the first licensed primary dealer appointed by the Central Bank, and is also the only listed and rated primary dealer in Treasury Bills and Bonds in Sri Lanka
First Capital delivers the only source for fixed income research in the local financial services industry. The Company’s best-in-class research team provide dynamic reports including economic reviews and proprietary research, encompassing fundamental, quantitative and technical analysis.

First Capital predicts possible policy rate cut next week amid sluggish economy

Daily Mirror | 03.04.2019

First Capital Research predicts a 50 percent chance for a policy rate cut at the next monetary policy review of Central Bank to be held next week amidst overly sluggish economic growth.
“First Capital Research allocates a 50 percent probability for a policy rate cut in April 2019 as we are of the view that policy intervention is appropriate to address the overly sluggish economic growth.

“Keeping in line with the possible introduction of a single policy rate, we believe a rate cut, if at all, will be applicable only to Standing Lending Facility Rate (SLFR),” First Capital Research said in its latest pre-policy analysis report.

Sri Lanka recorded an alarmingly low growth of 1.8 percent for the four quarter of 2018, while the annual growth for 2018 fell to 3.2 percent compared to 3.4 percent in 2017.
First Capital Research noted that probability of a rate cut increase by 40 percent given the less than anticipated GDP growth in the fourth quarter of last year. Hence, there’s a 50 percent chance for the Monetary Board of CB to cut SLFR by 25 bps to support the economic growth.

The Central Bank in their last monetary policy review reduced the Statutory Reserve Ratio (SRR) by 100 basis points to inject Rs.60 billion to the money market as they believed there was a Rs.100 billion liquidity deficits in the market.

Hence, First Capital Research expects a continuation of the rates while permitting the effect of the recent rate cut to materialize despite the increase probability for a rate cut at the next monetary policy review.

“However, considering the negative liquidity position we allocate a further 50 percent probability for no change in rates as the Central Bank may consider delaying the rate cut up to the next policy meeting in May 2019,” First Capital Research said.

According to their analysis, the probability for a rate cut in May monetary policy review will exceed 60 percent.

As US Federal Reserve signalled that it would keep policy rates unchanged for the rest of the year, First Capital Research said that the global fund flow, which is already shifting towards emerging markets, is likely to further strengthen and continue with the US yields easing off.

In addition, they said that the political uncertainty prevailed at the latter part of last year has worn off to a certain extent with the Tamil National Alliance supporting the UNF Government on the passing of the budget.

First Capital Research sees these developments positively impacting Sri Lanka’s external sector, paving the way for the Central Bank for a potential SLFR cut either in April or May.
The rupee has already strengthened this year by over 2 percent so far backed by foreign remittance conversions and foreign inflows.

First Capital Holdings PLC is an investment bank and is the pioneer non-bank affiliated Primary Dealer in Treasury Bills and Bonds in Sri Lanka. With a track record of over 25 years, the Company was the first licensed primary dealer appointed by the Central Bank, and is also the only listed and rated primary dealer in Treasury Bills and Bonds in Sri Lanka
First Capital delivers the only source for fixed income research in the local financial services industry. The Company’s best-in-class research team provide dynamic reports including economic reviews and proprietary research, encompassing fundamental, quantitative and technical analysis.

50 percent probability for a policy rate cut in April: First Capital Research

LBO | 02.04.2019

Policy-rates-april-2019

Apr 02, 2019 (LBO) – First Capital Research allocates a 50 percent probability for a policy rate cut in Apr 2019 as they are of the view that policy intervention is appropriate to address the overly sluggish economic growth.

Sluggish sentiment in Sri Lanka’s economy has been a major concern with the latest GDP growth for 4Q2018 recording an alarmingly low 1.8 percent.

Growth protracted in 2018 with annual GDP growth trimming to 3.2 percent compared to 3.4 percent in 2017.

“Keeping in line with the possible introduction of a single policy rate, we believe a rate cut, if at all, will be applicable only to SLFR,” the firm said in a pre-policy analysis.

“However, considering the negative liquidity position we allocate a further 50% probability for no change in rates as CBSL may consider delaying the rate cut up to the next policy meeting in May 2019.”

The Monetary Policy Review No. 2 of 2019 which was previously scheduled to be issued on 10 April 2019 as announced in the Road Map 2019, has been rescheduled to 08 April 2019 at 4.30 p.m.

The Central Bank reduced the SRR by 100 bps to 5 percent in February to address the large and persistent liquidity deficit which prevailed in the domestic money market.

“More recently the minor level of foreign inflows and the subsequent foreign remittance conversions are having an impact on liquidity curtailing the deficit while we expect the situation to further improve over the next few weeks,”

“Political uncertainty has worn off to a certain extent with the TNA supporting the UNF Government on the passing of the budget.”

The rupee continued to strengthen to close at 176.17 on 28 Mar 2019 supported by foreign remittance conversions and foreign inflows.

“We expect the REER to have reached 97-98 range with the rupee appreciation together with the strengthening of the dollar index in Feb and Mar 2019,” First Capital Research said.

“REER for Jan 2019 recorded at 94.18 indicating the undervaluation of the currency.”

Meanwhile, the Fed reserve officials have decided to keep rates unchanged at the meeting held in March and signaled to pause rate hikes in 2019 while certain analysts expect a possible reversal instance to a single rate cut in late 2019.

“Global fund flow which is already shifting towards emerging markets is likely to further strengthen and continue with the US yields easing off,” First Capital Research said.

“Resultant to the continuous foreign inflow witnessed in the secondary market since Mar 2019, short to belly end of the yield curve plunged by 5-23 bps shifting downwards while equity market witnessed a net foreign outflow.”

First Capital Holdings PLC is an investment bank and is the pioneer non-bank affiliated Primary Dealer in Treasury Bills and Bonds in Sri Lanka. With a track record of over 25 years, the Company was the first licensed primary dealer appointed by the Central Bank, and is also the only listed and rated primary dealer in Treasury Bills and Bonds in Sri Lanka
First Capital delivers the only source for fixed income research in the local financial services industry. The Company’s best-in-class research team provide dynamic reports including economic reviews and proprietary research, encompassing fundamental, quantitative and technical analysis.