Monday, February 27, 2012

Analyst: ‘Take bold steps to provide accurate forecasts rather than trying to hide the obvious’

*Rs. 1bn net foreign inflows stimulates positive moods in desperate CSE

*Market digests ‘new’ economic climate

An equities market analyst says the Rs. 1 billion net inflow of foreign investment into the Colombo Stock Exchange (CSE) has lifted moods in a market desperate for change.

The All Share Price Index closed 1.07 percent higher on Friday to 5,566.30 points, continuing on a positive run after weeks of sharp declines.

"The market has moved from being extremely pessimistic to moderately bullish towards the end of the week. We have seen close to Rs. 1 billion in foreign purchases for the year and the main beneficiaries were JKH and COMB. This positive influx of funds has helped stimulate a positive mood in the market that was desperate for change," said Stefan Juriansz, Technical Analyst, Bartleet Religare Securities.

"However one concerning factor was that COMB has hardly moved from Rs. 100 while shares swapped hands. Once the selling stops we hope that the stock would resume its uptrend and keep Rs. 100 as support rather than becoming resistance for the stock. JKH on the other hand seems to have now found solid support at Rs. 160 and the stock now has the potential to move towards Rs. 210. If JKH were to head towards the technical target, the index which follows has the potential to move towards 6,100. This move up for the index would be a short term bullish correction in a bear market.

"Technically the ASPI is stuck in a downward trading channel with a channel resistance of about 5,650, while the MPI will face heavy resistance at 5,000. The market would be looking to break above these levels next week and head higher, however such a move without some consolidation will be difficult and ideally we would look for the market to drift towards 5,350," Juriansz said.

The Economy

Even though the index seems to have found temporary support, we believe that the economy may see signs of hitting a plateau, he said. "The Central Bank will have a difficult job striking a balance between inflation and growth and will try not to raise rates in the face of steep inflation which is supposed to be ‘6 percent’."

As reported in The Island Financial Review last week, Standard Chartered Bank in its latest country report suggests that the Central Bank would have to raise rates by 0.75 basis points and the rupee to devalue further this year as market forces cannot be stopped.

"We feel more rate hikes may be in the cards as we feel that the hefty loan growth may not be sustainable over the long run. Bank sector asset quality has hugely improved from the lows of December 2009 where NPLs peaked at 8.5 percent to 3.8 percent in December 2011," Juriansz said.

"If the loan growth continues at these high levels, we may see asset quality being compromised in the longer run coupled with the higher forecast interest rates. We however find the current quality of banking assets satisfactory with the more stringent CBSL reporting regulations. At present the market has digested the new economic climate that revealed itself last week. It is now imperative that the key stakeholders take bold steps to provide the market and the economy with accurate forecast rather than trying to hide the obvious. The market is fragile and unexpected announcements or unstoppable market moves can kill the momentum and will bring about the next leg of the bear market."

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