Business Times

Listed firms overvalued ; time to take the chips off the table

Most listed firms at present are overvalued according to some analysts and the growth these companies have seen in the current year cannot be sustained in the next two years which is why they recommend a gradual decrease in investor portfolios.

“The calendar year 2009 was a tough year for the economy and many listed firms. For corporates with their years ending December 2009 or March 2010, the first half of these financial years showed extremely poor results which saw the year end results in most companies decline,” Dimantha Mathew, Analyst Capital Alliance said, explaining that the end of the war witnessed sharp growth in results in almost all the listed companies from the start of this year.

He added that the reasons for the sharp growth seen in the said year are low interest rates, significant improvement in macro economic conditions causing higher demand and finally because the last year was a very bad year.

He also noted that with this top line growth most companies saw their finance costs halve as a result of the low interest rates. "Therefore strong growth figures in the present financial year could be seen in most companies," he said, adding that this saw the stock market sky rocket and most company share prices have over shot their fair values.

“Therefore it is difficult to repeat the same growth rates in the next year as well. With the overshooting of the fair value targets we have currently placed a downward index target for the next one to 1 ½ years, which means that we expect the market to come down because it’s overvalued.” He added that this may not happen immediately and therefore investors need to slowly sell out of their portfolios.

Some other analysts rubbished this reasoning. Sarath Rajapakse, Director Capital Trust noted that state policies to boost development and growth are likely to bear fruit and Sri Lanka is likely to be a regional economic super power in the coming years. He also said that the IMF too is confident and optimistic about this. "Aggressive interest rate cuts will help this cause. Low debt servicing costs will have a tremendous impact on company bottom lines. With one of the strongest and most stable governments in Asia this country is likely to be the most favoured destination for international investment funds,” he added.

Others too agree with the majority saying that the share market in its present phase is a bubble, egged on by price manipulation by malicious individuals. “My recommendation is to take 50% of ones chips off the table,” said Murtaza Jafferjee, CEO J B Stockbrokers.

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