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Corporate earnings to recover from 4Q19 – FC

CEYLON TODAY | 08.07.2019

Investment Bank in Sri Lanka

Earnings of Sri Lanka’s listed firms are expected to improve from the fourth quarter of 2019 as the country is recovering faster than expected from the Easter Sunday attacks, the research arm of First Capital (FC), an investment house said.

“Despite the Easter Sunday attacks, Sri Lanka’s economic outlook has shown signs of resilience and ability to recover quickly, as economic activities were seen returning to normalcy while removal of travel advisories were faster than anticipated,” Research Head, Dimantha Matthew said.

“Though the unfortunate attacks and the subsequent events are likely to have directly or indirectly impacted all sectors affecting earnings of most companies, we believe that the impact has now been factored into the market, and an accelerated recovery is more likely than not,” he said.

“The heavy decline in interest rates is expected to lower finance costs, thereby improving earnings of most listed entities towards 4Q 2019.”

He said stocks are becoming more attractive as bond yields are moving downwards following Sri Lanka’s US$ 2 billion sovereign bond sale, which was oversubscribed and showed investor confidence.

Bond yields are likely to remain low due to current inflation, credit growth, liquidity and reserves, he said.
With the Central Bank ceiling on fixed deposit rates linked to gilt yields, investors are likely to turn towards the equity market, Matthew said.

“Lower fixed income returns may lead investors to hunt for alternative investment options with higher returns, of which equity investments are likely to be a more probable option considering the current attractive valuations,” he said.

The market-price-to-earnings ratio was an 8.7 multiple on Thursday.
Thereby we expect an improvement in demand for stocks leading to a possible re-rating of the market,» Matthew said. (Economynext)