Monday, October 1, 2012

DNH Financial on market’s trajectory

While some investors appear to be concerned over the prospect of only pedestrian returns in the stock market at current levels, we believe that such concerns may be warranted only if their investment style is one of a short term speculative strategy. We assert however that for those whose investment horizon is beyond the short term could well expect to enjoy more sustainable above average returns over the longer term.

Consequently, we advise investors to maintain a healthy investment horizon focusing on high quality cash rich companies with strong balance sheets that have underperformed during periods of market over-exuberance and which have the upside potential to re-rate to their intrinsic values.

 With 3Q2012 corporate results to be released soon, we expect strong EPS growth in selected counters and recommend investors to focus on companies that have a dominant market position and are intrinsically sound while advising against taking speculative positions in stocks.

 We reiterate a focus on companies with sustainably high ROCEs and defendable competitive advantages, resulting in above average earnings growth potential that is still not fully factored into share prices.

 In terms of market trajectory, we expect the bourse to test the 6000 key resistance level next week although intermittent bouts of profit taking could result in temporary dislocations.

 Meanwhile, the uncertainty that have been rattling global investors over the Eurozone debt crises is unlikely to dent the performance of the Sri Lanka bourse as there appear to be a clear polarisation between the performance of the Sri Lanka equity market vis-à-vis global peers.

 Foreign fund managers are therefore advised exploit Sri Lankan equity opportunities using an active portfolio management approach in their stock selection process in order to generate alpha. (DNH Financial.

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