Foreign buying anticipated at CSE
Stock market analysts predict that foreign appetite in local stocks will increase in the months to come on the back of West Asian tensions driving emerging market and frontier market funds into this region.
Though the crisis between the US and Iran seem to be somewhat tapering down, the tensions remain and is so in most parts of the world. Dimantha Mathew, Head of Research at First Capital Equities confirmed this to the Business Times saying that South Asia which includes Sri Lanka is identified as a ‘safe haven’ by emerging market and frontier market funds. He noted that there is a likelihood of them coming into Sri Lanka in the months to come.
However, others are not so sure. Some analysts noted that Sri Lanka is facing an election and a budget in the coming months. The growth forecast by the Central Bank is 2.8 per cent. The government is also taking up large-scale infrastructure development projects. Add to these issues, the government has instructed the penal penalty to be cut on small and medium enterprise loans to the tune of Rs.300 million. This too will highly impact the bottom lines of banks.”All these factors will play on foreign investors’ minds. So, it is not very possible that they will be ‘flocking’ to Sri Lanka,” an analyst opined.
Mr. Matthews and like-minded fellow analysts are positive. “This emerging and frontier market funds are experts. They know when to get in and out. They are aware of the volatility, the risk etc of markets like this,” Mr. Matthews noted.
He added that new valuations in Sri Lanka are now regarded as ‘dirt’ cheap. The banks are trading at half or two thirds of their valuations.”This has been happening for more than a decade – since 2009 such valuations started. This is rare. Also during tensions, most investors are looking for ‘safe’ markets. Added to that global interest rates are moving down and are now much stable.” He added that while the macro fundamentals are not so bad, the only thing lacking in Sri Lanka was the growth rate and the political stability. “With the elections, politically it is more stable now and the growth has been slowly kicking in. These are the factors that foreigners are interested in.”
However when pointed out that there has been foreign selling during this week, he said that foreigners who took a long-term position, are selling and booking capital gains. “There are many queries from new funds to get into the market.” Foreign investors were net sellers in 2019, with Rs. 11.8 billion in net outflows as against a net outflow of Rs. 23.2 billion in 2018.
Another analyst said that some US funds are eyeing banks and blue chips. “By middle of this year if delivery versus payment (DVP) is established, then foreign investors will be even more willing to invest in the Colombo Stock Exchange (CSE) as then there will be a settlement guarantee. DVP settlement system ensures that securities delivery will occur only if a payment occurs. The system acts as a link between a funds transfer system and a securities transfer system. By far the largest financial risks in securities clearance and settlement occur during the settlement process, that is, the process through which the transaction is completed by final (unconditional) transfer of securities from the seller to the buyer (delivery) and final transfer of funds from the buyer to the seller (payment).
The CSE is trading at a discount relating to most frontier and emerging markets at a market Price Earnings of 10.68 times and a price-to-book value of 1.14 times. The main ASPI closed the year on a positive note of a 1.27 per cent year-to-date gain which is encouraging given that it ended on a negative 4.98 per cent in 2018.