Research Firm Positive of Equities
By Paneetha Ameresekere
First Capital Equities, in a recent report, ie its outlook for this month (June) is positive about the bourse. It, however, in its ‘permutations and combinations,’ seemingly overlooks the fact that the bourse has been suffering consistent net foreign outflows (NFOs), a sum of Rs 25.88 billion, as at Tuesday, a 96.68 per cent year on year (YoY) increase, which is negative for the bourse.
And the other apparent drawback, comparisons are vis-à-vis equities’ performance of last year, a year that the country recorded its worst economic performance in its recorded history, where the economy contracted by 3.6 per cent, ipso facto ‘alluding’ to the fact that the performance of the equities this year is being compared from a lower base vis-à-vis their last year’s performance.
Nonetheless, First Equities, in a rider to their seemingly bright report on the bourse said, “However, investors should be mindful of the economic uncertainty and high foreign debt repayment which could lead to a sudden shock / black swan event in the medium term.” Following are excerpts from their report: “We revise our market earnings forecast upwards despite the 3rd wave of COVID-19. Despite the significant risk in the system due to the uncertain economic environment, the higher liquidity in the system and cheaper valuations due to healthy earnings, we are upgrading the ASPI fair value for 2021E to a range of 7,500-8,000 from our previous range of 7,000- 7,500.
It amounts to a market return of +18 per cent for 2021E, despite valuations been downgraded to a price to earnings ratio (PER) of 12.0x-12.5x (previous 14.0x-14.5x) considering the risks to the economy. However, considering the fact that market has already reached the 7,500 range, we recommend to hold on to the equity allocation and begin exiting beyond 8,000. Considering increasing economic uncertainty and potential shocks, we are maintaining an expanded range for 2022E of 7,500-8,250 with a note of caution.
Taking into account the elevated earnings potential, First Capital Research has upgraded its earnings outlook in absolute terms which translates to a growth of +24per cent for 2021 estimate (E), while a much lower outlook is anticipated for 2022E of +12per cent considering the risk involved in the system. Rising interest rates could be considered as a significant risk for the equity market.
However, though we have already witnessed an uptrend in yields, the uptrend has been slow, due to the continuous maintenance of the liquidity position in the money market fuelled by the rise in CBSL holdings. This trend is likely to continue as the GoSL continuously falls short of the revenue targets leading to money printing measures.
GoSL further revised its already high budget deficit upwards to 9.5 per cent of GDP but is most likely to reach a double-digit deficit similar to 2020 amidst the continued infrastructure spending and additional unplanned spending required due to the 3rd COVID wave. Therefore, due to the risk in the system the rise in interest rates are likely to continue but at a much slower pace which is unlikely to impact the equity market.”