Thursday, January 10, 2013

Bourse to grow this year after fall caused by weak economic management

The country’s equities market could see growth this year after declining in 2011 and 2012 on poor macroeconomic fundamentals.

Poor economic management drove down the Colombo bourse last year, a point not shared by many stockbroker firms which instead blamed the Securities and Exchange Commission (SEC) for the exchange’s dismal performance, convincing the government that overregulation was the prime culprit and succeeding in ending the regulator’s crack-down on rampant market offences.

Authorities had ignored a balance of payments problem in 2011, taking belated measures last year to rectify the issue, which caused more pain to the economy.

The Colombo Stock Exchange fell 7.1 percent in 2012, slower than the 8.5 percent fall in 2011. The exchange surged in 2009 and 2010 with a few broker firms pointing out that this upswing was unrealistic and the Central Bank saying the market was overheated.

"The Colombo Stock Exchange declined drastically to lose 18.26 percent for the 1H 2012 predominantly due to the painfully tight monetary and fiscal policies introduced within the first few months of the year, creating an expectation of a possible economic slowdown," Asha Philip Securities said in a recent report.

"But, the market regained momentum within the 2H2012, gaining 13.17% mainly owing to the gradual recovery of the rupee against the USD amidst slowing imports, relaxation of broker credit and trading rules by the SEC, healthy corporate earnings results by most of the listed companies overshooting market expectations amidst challenging economic conditions. The month of September led growth in the 2H 2012 by recoding a healthy 15 percent upsurge whilst a 5.4 percent growth was recorded in December, pushing the All Share Price Index (ASPI) to close above 5,600 levels. The month of May was the worst month of the year, with the ASPI losing 10.83 percent."

Foreign inflows in 2012 amounted to Rs. 38 billion, a significant improvement considering the net outflow of Rs. 19 billion in 2011.

Market Capitalization fell by 2.09 percent in 2012 to Rs. 2.16 trillion from Rs. 2.21 trillion a year earlier despite 6 new listings via IPOs, 12 new listings via Introductions and 16 rights issues worth Rs. 11.1 billion.

Asha Philip Securities says 2013 would be a better year for the bourse with macroeconomic fundamentas improving further this year; interest rates and inflation are expected to ease further, making the Colombo Stock Exchange an attractive investment destination for local retailers.

"The Banking & Finance sector is expected to grow at a faster pace in 2013 against the growth levels recorded in 2012 supported more with the liberalized credit ceiling coupled with the expected growth in asset quality. Moreover, the reduced interest rates will provide a hefty cushion on the bottom line of companies with relatively high gearing via reducing interest cost, leading to an upsurge in earnings.

Given the pick-up in consumption levels in the economy together with the growth in the tourism industry, a fresh round of demand for food and beverages would emerge, enabling the food and beverage sector to experience a prospective year. Further, the government’s plan to promote a ‘Sports Economy’ concept would also intensify the growth prospects of the sector.

"Rebounding construction activities amidst relaxed interest rates and increased accessibility to credit will create opportunities for companies in this sector, generating opportunities for the local construction material manufacturing sector, such as cement and cables, Tariff differentials to this sector at the point of Customs would also have a positive impact.

"Tea Plantation companies may face another round of challenges with the upcoming wage revision in mid-2013, eroding their cost factors, a factor not likely to impact rubber and palm oil operations due to their lower labour intensity."

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