| Push in interest rates urged to cut inflation-report
Nominal interest rates are still insufficient to discourage private sector credit growth and to reduce money circulation in the economy, which is essential to reduce inflation, a top stockbroker said.
CT Smith Stockbrokers Ltd, in its monthly report for December which also analyses the trends in 2006 and prospects for 2007, said if the current macro economic conditions continue this year and the local currency remains under pressure, leading to cost push inflationary pressure (CCPI average inflation is forecast to 13.2 in 2007), the Central Bank is expected to increase its policy rates by approximately 125 bps (basis points) by end 2007.
The broking firm said the Colombo bourse ended the year on a subdued note after peaking at record highs in early December. The All Share reached an all time high of 2,790 points, while the Milanka peaked at 3,795 points. However both indices ended the month down by a modest 2%. Market activity also witnessed a significant drop compared to the preceding month with the advent of the holiday season. Higher interest rates, coupled with rising inflation meanwhile continued to worry investors, and as expected the Central Bank hiked its key policy rates by 37.5 basis points, the first such increase since a 50 basis point hike in September. While foreign participation was 39%, they were net sellers in December to the value of Rs.418 million.
It said the stock market enjoyed another record breaking year as the All Share Price Index peaked at an all time high of 2,778 index points in December, subsequently ending the year up 42% YoY. Meanwhile, the Milanka Index, which tracks the performance of the blue chip stocks, appreciated 51% YoY for 2006. The market comfortably beat its performance the previous year (+28% YoY) while also encompassing lower volatility (standard deviation of daily returns for 2006 was 1.09 in 2006 compared to 1.36 in 2005).
The impressive performance of the overall market was despite the primary market witnessing disappointing activity levels, the broking firm said.
The overall growth was broad based with the notable exceptions of the Power & Energy (-17% YoY), Services (-1.9% YoY) and Stores and Supplies (-5.5% YoY) sectors. However, Diversified Holdings and Telecommunications Sectors which collectively account for close to 50% of total market cap had a significant influence on the overall market performance. In particular, the performances of Dialog Telekom (+61% YoY), John Keells Holdings (+50% YoY) and Sri Lanka Telekom (+ 68% YoY) were noteworthy.
Rupee
Notwithstanding higher relative inflation, the Sri Lanka Rupee remained strong against most major world currencies during 2006. Although the trade deficit has been widening, the government has kept interest rates low and even below inflation, and has facilitated the rapid expansion in private sector credit which has contributed positively to corporate earnings in 2006.
However it has been not only in Sri Lanka that higher liquidity and strong corporate earnings have been driving equity markets upwards. Global equities are estimated to have grown 18% in 2006 with many stock markets reaching or getting close to their record high by the year end, the report said.
Tourism
Tourist arrivals in Sri Lanka reduced further during the season recording a 22% YoY decline to a low 37,591 arrivals in November 2006, the highest YoY dip during the year. However year-to-date arrivals were still up 4% YoY to 520,379 visitors, due to record arrivals in the first four months in 2006 (despite arrivals in 2005 being partly inflated by tsunami aid-workers and Sri Lankan expatriates). However, compared with tsunami-free November 2004, arrivals were down by 42%, the third consecutive monthly decline and the highest monthly decline in 2006. The record decline in November was due to uncertainty in the peace process with attacks that took place in popular tourist destinations and in the capital Colombo, targeting government officials. The travel warnings issued by some countries including the U.S.A. and Australia may also have partly impacted arrivals. Arrivals from the key Western European segment recorded a sharp 40% YoY decrease to 12,789 persons in the month and were the highest contributor to the total arrival dip at 79%. Also compared to November 2004, Western European visitors declined substantially by 61% in November 2006, the report said.
Indians, who showed an increasing appetite to visit Sri Lanka amidst attractive pricing and increased flight availability, decreased 12% YoY in November 2006 to 9,302 persons, but however still retained its dominant position as the island's single highest tourist generating market.
Due to very low holidaymakers in the country and poor arrival expectations in 2007, most hotels charging premium prices targeting high net worth locals and foreigners, now offer discounted packages (50% or more) to achieve sustainable earnings and to maintain occupancy levels.
“We therefore expect tourist arrivals to be maintained at 555,506 visitors in 2006 compared to 2005 (3% below our original estimate of 570,102 visitors). Further, due to the fact that Sri Lanka may receive lower prominence at promotional campaigns of world tour operators for the next season (the World Travel Market for instance was held in London in November 2006), we now downgrade our arrivals forecast further to 446,332 persons in 2007, which is a 19.7% decline (18% below our original estimate of 543,877 persons). This would be mainly due to the large drop in arrivals anticipated from the key western European nations, which are estimated to be -36% YoY to 144,638 visitors in 2007. Meanwhile, arrivals from the main Indian market are also expected to decline by 12% YoY to 113,323 visitors in 2007, due to more Indians who were attracted in 2006 with the Indian cricket team's tour of Sri Lanka and the South Asian Games being held in the country,” the report noted.
Economy
The Sri Lankan economy grew by 7.5% in 3Q2006, higher than the 6.9% recorded in the corresponding quarter of 2005, and broadly in line with CT Smith’s expectations. GDP growth for 1-3Q2006 of 7.8% was consequently significantly higher than the 5.8% recorded in the corresponding period of 2005. The impetus for economic expansion came from telecommunication, financial services, cargo handling, trade and electricity sectors. However, the quarterly growth rate has slowed down from 1Q2006 and 2Q2006, at 8.1% and 7.6%, respectively.
Services
Contributing to 63% of the absolute growth in 3Q2006, the sector prevailed as the dominant force in the economy. The growth was largely driven by the performance in the post and telecommunications subsector (+26.7%). Subscriber levels of cellular phones expanded by 54%. CDMA technology meanwhile resulted in a 152% expansion in the fixed wireless segment. Comparatively, the fixed wire line category grew by a more sedate 2%. “We expect significant growth in the post and telecommunications sub-sector to continue in 2007, due to further CDMA expansion as well as increased subscriber levels of cellular market,” it said.
The Colombo Port meanwhile handled a volume of 840,000 Twenty Foot Equivalent Units (TEUs) in 3Q2006. Domestic throughput volume dropped by 1% with transshipment volumes however increasing by 46%. The proposed construction of the Colombo South Harbour will increase capacity from 4 million TEUs to 12m TEUs, the results of which will begin to be seen once the first phase of the project is completed (by 2010), after which further growth will be seen in this sector, with increased volumes (especially transshipment volumes) coming in.
Agriculture
The Agriculture, forestry and fishing sector recorded a growth of 4.5%. The positive impact of the recovery in the fishing sub-sector from the tsunami continued to be seen in this quarter, with the greatest impact of recovery being seen earlier on in the year. Production in key plantation crop tea contracted by 0.7% in 3Q2006 due to extreme weather fluctuations and the fall in fertilizer usage as a result of the revised subsidy scheme. The negative impact of the recent plantation workers strike is likely to be seen in 4Q2006, with the full impact of increased costs in the subsector due to higher wages likely to be seen in 2007. Rubber production also declined by 0.4% compared with a growth of 21.8% in the corresponding quarter of the previous year.
Growth
GDP growth is likely to slow down in 4Q2006 due to continuing political uncertainty and rising inflation and interest rates exacting a toll on the key growth sectors of the economy, with ‘full year GDP growth expectations forecast for 2006 being 7.2%,’ the report said. “We forecast growth in 2007 to ease slightly, but remain at approximately 7.0% supported mainly by the services sector,” it noted.
Trade deficit
Even though the trade account was negative during the month, the overall balance of payments recorded a surplus of US$46 million during Jan-Oct 2006, partly due to high worker remittances. Worker remittances increased 18.4% YoY to US$191.9 million in October 2006, resulting in a 21.7% YoY growth to US$1,902 million in Jan-Oct 2006. The country's gross official reserves remained steady at US$2,373 million or 2.8 months of imports as at end of October 2006, the report said.
Recent trade union action by estate workers will result in a loss of production in tea during the last two months of 2006, which in turn will further lower export earnings from the segment. According to industry sources, over-grown tea bushes would have to be pruned before plucking and this will take as long as end January 2007 to recover. Therefore tea exports in 1Q2007 are also expected to be affected due to certain quality issues. Even though the depreciating currency will have a positive impact on the trade account in the long run, it is expected to be widened further in the short-term due to additional provision on essential imports such as petroleum.
Foreigners strong buyers in 2006 despite political setbacks
Despite numerous political setbacks across 2006, the increasing resilience of investors was clearly reflected in the Colombo stockmarket’s spectacular performance and an additional encouraging point to note is that foreigners remained undeterred by any adverse situations and were more prominent on the buying side, Bartleet Mallory Stockbrokers (Pvt) said in its annual review for 2006.
It said all the fundamental counters proved strong, providing impressive capital gains and most even outperforming the market and investors should take note and invest in these clear winners in the market pushing for an even more successful 2007.
Excerpts of the report:
The bourse geared up for the Presidential elections held on November 17, 2005 with both the ASPI and MPI significantly increasing in the days leading upto it, however the escalating violence in the North since the beginning of December contributed to the market’s slip sliding behaviour. Thus the New Year commenced on a depressing note but on January 26 news of the government and the LTTE agreeing to peace talks in February, boosted the market which saw both indices accelerating by more than 7% on that day alone, the highest daily percentage gain since March 2004. However the market failed to sustain momentum and both indices proved volatile with further incidents of political disturbance which saw investors begin to take a somewhat cautious approach with regard to trading resulting in turnover averaging at moderate levels.
With the peace talks that were held in Geneva during the end of February concluding with both parties agreeing to strictly adhere to curb hostilities, proved to give a welcomed boost to investor sentiments and this saw trading activities intensifying once again. However March proved to be a month of highs and lows with most investors preferring to maintain short term positions and hence profit taking saw the indices dip on sporadic days.
The peace talks didn’t materialize as scheduled with both parties disagreeing on various arrangements triggering investor caution again and the end of April saw the first bomb attack in Colombo since the 2002 Ceasefire Agreement, near the Army Headquarters.
This panicked the market with both indices taking a sharp nosedive resulting in the ASPI losing 53 points while the MPI slipped 73 points.
The following day too saw an average 100 points drop in the indices whilst an inevitable technical correction enabled the lost ground to be recovered by the end of the week. Inspite of this negative sentiment the fundamentals in the likes of top stocks were seen holding ground with limited price falls.
The bus bomb attack in Anuradhapura on June 15 triggered panic yet again and the market tumbled more than 65 points on that day alone. But bargain hunters proved active on the following day, taking the market higher to recover most of the previous day’s loss.
The month also saw investor attention shift from the fundamentals to the low valued speculative counters enabling them to get a quick but risky gain with massive quantities being traded. The final week of June commenced on the disturbing news of a bomb attack in Pannipitiya which killed a Major-General but the market proved mature in reacting negatively for only the first half hour of trading on that Monday and then taking a u-turn to positive grounds.
After a long dry spell, the market witnessed a much awaited bull run towards the end of July with the ASPI advancing more than 100 points in the final 2 weeks, but this trend failed to continue into August with clashes in the North depressing trading activities once again. Another bomb attack in Colombo on August 14 saw the ASPI take a significant decline with a 55 point dip but the market proved quick in recovering partially the following day itself. The market rejoiced during the second week of September on the back of news of a positive direction with regard to peace talks and both indices surged ahead with an average 100 point jump with most counters across the board witnessing impressive price hikes. This trend continued into the first week of October, however heavy fighting erupted once again in the north but the market managed to stay relatively upbeat focusing on the peace talks to be held towards the end of the month, with all fervently hoping for a breakthrough. The historic signing of the MOU between the country’s two main political parties towards the end of the month also saw the market advance considerably. However news of that weekend’s peace talks failing to deliver results depressed the market and both the ASPI and MPI witnessed a temporary slump whilst a subsequent technical correction pulled the market back to positive territory.
November proved to be a trailblazing month at the CSE with a massive bull run on key stocks like JKH, DIALOG, DIST, seeing the market reach milestones figures in its indicators successfully breaking previous highs for the first time.
As expected December remained somewhat sluggish and lackluster in performance with most investors taking a backseat to enjoy seasons festivities. Thus the year ended on an impressive note, with the ASPI advancing 800.24 points (41.63%) to close at 2722.45 while the MPI surged 1258.11 points (51.33%) to finish the year at 3709.17.
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