Quote for the day

"Bull markets go to people's heads. If you're a duck on a pond, and it's rising due to a downpour, you start going up in the world. But you think it's you, not the pond." - Charlie Munger

Policy rates revised downwards while market soars...

The activities at the bourse sustained the upward momentum from the previous week with both indices gaining considerable value. The ASI gained 236.82 points WoW to close at 6,250 points (3.9%), whilst the S&P SL20 Index gained 124.91 points WoW to close at 3,530.90 points (3.7%). Indices benefited mainly on the back of the gains made by John Keells Holdings (6.2% WoW), Aitken Spence (8.8% WoW), Distilleries Company of Sri Lanka (6.3% WoW), Hemas Holdings (20.7% WoW) and Vallibel One (14.5% WoW).

Heightened activity was witnessed across the board in the Colombo bourse over the week which led to the market appreciating close to 4% WoW which also resulted in a jump in YTD performance from 6.6% to 10.8%. This may have been due to a build up in anticipation of a possible revision of policy rates which was scheduled for the end of the week. 

Investor expectations were confirmed with a significant 50 bps reduction being made to policy rates. Interest continued to be witnessed in Banking & Finance sector counters with firms such as Commercial Bank, Hatton National Bank, National development Bank and Seylan Bank on the expectation that the policy revision will be favourable to earnings. 

Having said that, we would like to draw investor attention to the following developments; The CBSL disclosed that a pickup in Furnace oil prices was witnessed in April whilst the proposed electricity tariff hike was finalised. The combined effect could place supply side pressure on Inflation which could dampen the performance of energy intensive firms in the short to medium term.

The week also marked a change in ownership which took place in Lanka Ceramics where Royal Ceramics acquired a controlling stake in the former. As per a CSE disclosure, approx 22.8mn shares of Lanka Ceramic which represents 76.1% of the issued share quantity was directly purchased by Royal Ceramics. As a result considerable activity was witnessed in the two counters as well as in Vallibel One; the parent company of Royal Ceramics during the first half of the week.

Furthermore, Lanka Ceramic, Touchwood Investments, Vallibel One, PC House and Commercial Bank topped the list in terms of volume traded during the week.

The week saw foreign purchases amounting to LKR 1,880.4 mn whilst foreign sales amounted to LKR 1,216.4 mn. Market capitalisation stood at LKR 2,395.5 bn, and the YTD performance is 10.8%.

Conclusion:


Policy Rate cut coupled with continued foreign participation to boost investor confidence...

Market gradually continued to build up on the 6,000 levels, after falling below the 5,000 levels in August last year. All Share Index managed to accumulate a whopping 236.8 points during the week on the back of healthy retail and institutional participation. 

Fundamentally sound stocks were taking the lead, whilst foreign investors continued with their block trades in selected counters resulting in the net foreign inflow for the week to reach a satisfactory LKR664 mn. It could be observed that continuous foreign investor participation had been an inspirational factor for local institutional investors to be active again.

CBSL announced a 50 basis point (bps) policy rate cut on Friday paving its path towards a further monetary expansion since the 25 bps policy rate cut in December 2012. 

Accordingly, after the policy rate reduction, Repurchase rate (REPO) would be at 7.0% while the Reverse Repurchase rate (Reverse Repo) would be at 9.0%. CBSL expects the policy rate reduction to increase private sector credit growth, and improve the economic growth whilst facilitate the government to finance the public investment programme at lower costs. On the back of this development, we expect the equity market to be more attractive relative to other investments modes. Thus, we advice investors to take positions on fundamentally sturdy counters with high growth potential to reap benefits.

Further, country’s Treasury bill rates also witnessed a continuous decline over the past few weeks which could also be attributed to the expectations regarding the reduction in policy rates. During the week the 3 months T-bill rates dipped by 02 bps to stand at 9.18% while six months T bill rates also dropped by 02bps to close at 10.20%.
Source: Asia Wealth Management Research