Sri Lankan stocks should be more pricey than current levels after the war gave it buoyancy and vigour similar to pre-war levels, industry analysts say.
They said the corporate earnings in the past, despite the uncertainty that prevailed were resilient and that almost all shares in the Colombo Stock Exchange (CSE) warrant a higher re-rating in the current economy. An analyst said that if a manufacturin sector or a leisure stock is now valued at Rs 30, it deserves to be about six to 10 times higher in value.
Nikitha Tissera, Head of Research Sampath Securities said that the market’s price per earnings ratios should adjust as long-standing unfavourable factors have been removed. “The removal of a 3-decades-old war clearly calls for a significant re- rating. This means the country faces significantly less political and economic risk; more state funds could be used for infrastructure building as opposed to war and high trade insurance premia associated with war risks could come down," he said. He noted that future forecasts should always be lower than historical data in stocks that one invests in given the positive earnings outlook.
Jaliya Wijeratne, Director, SMB Securities said that the CSE should be valued on par with other emerging markets. He said that going forward, with the positive macro developments and anticipated increase in economic activity coupled with the gradual recovery of global economy trickling down to the corporate sector, corporate sector earnings would rise from 2010 onwards. “This would be further strengthened by the policy decisions of the Central Bank (CB) to ease off foreign exchange controls, maintaining low interest rates, development of North and East etc.
Sarath Rajapakse, Director Capital Reach Securities said that Sri Lankan stocks are grossly undervalued and under priced even in relation to current earnings. “The war is over even though some have not yet realized the full implications of this fact. More than the ending of the war the current 'liberalization' mood of the CB is most encouraging though this sudden change for the better may be an 'implied' condition of the IMF assistance package,” he said. He noted that the CB suddenly deciding to pump liquidity into the domestic economy by refusing all bids at the latest Treasury Bill auction will also help to bring down domestic interest rates further.
He also noted that the simplification of foreign indirect investment into the country via stocks and government bonds is likely to result in a flood of funds into the market. |
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