The Island - 01/01/2015
Service sector dominated Sri Lankan economy grew 7.3% in 2013 despite challenging 1H13. However 1-3Q14 saw 7.7% growth led by construction, apparel and recovery in agriculture sector. Thereby we expect the economy to end the year with a GDP growth of 7.8%.
Annual average inflation remained in single digit level for the past 65 months ending 2014 with an inflation of 3.3%. Given the lower inflationary environment, interest rates continued to decline during 2014 where the prime lending rate stood at 6.3%. Despite the declining interest rates, credit growth was rather slow during 1H14. However credit demand showed signs of recovery recording 5.1% YoY in the month of October. Rupee against the US Dollar was stable at LKR130.0 levels during 2014 largely due to lower oil prices and recovery in exports.
During the first 10 months of 2014 exports grew 9.7% YoY. Recovery in European and US markets saw the apparel exports grew by 13.9% YoY. Further exports from the agriculture sub segment also grew 10.3% YoY. Import expenditure rose 7.3% YoY during the first 10 months of 2014 largely due to 16.7% YoY growth in fuel imports. Thereby the trade deficit widened 4.3% YoY which is c.9% of GDP. However with strong remittance growth and other financial and capital account investments drove the overall BOP to a surplus of USD1.7 bn during Jan-Oct 2014. Further gross official reserves stood at USD8.8 bn which is sufficient to finance 5.6 months worth of imports.
Continued efforts towards fiscal consolidation saw the budget deficit as a % of GDP brought down to 5.0% (expected) in 2014 from 5.9% 2013. Further government plans to bring it down further to 4.6% of GDP in 2015E. During 1-3Q2014 government revenue grew 6.0% YoY whereas government expenditure grew 3.7% YoY. Government expects to further simplify the tax structure thereby broadening the tax base. Further debt to GDP stood just above 80% in 2012 narrowed to 78% in 2013 and the country expects to bring it down below 75% level in the medium term.
After a dull 2013 the equity market rallied in 2014 to end the year with ASPI up 23%. Further average turnover levels (LKR1,411.0 mn) and trading volumes (66.8 mn) also picked up in 2014 whilst we saw a foreign net inflow of LKR21.6 bn . Construction, Banking, Finance & Insurance (BFI) and Telecommunication were the top performing sectors whilst the market witnessed 5 major transactions in JKH, ODEL, HHL, HPWR and EXPO. 4 companies made its debut on the Colombo bourse during 2014 raising LKR2.7 bn whilst 18 debenture issues were seen in the market raising LKR48.1 bn. Further corporate earnings also grew 17.5% YoY during 1-3Q2014 BFI and Diversified sectors.
The broader market is trading at an overall market PE of 14.9x four quarterly earnings while corporate earnings denote strong growth potential amidst the favourable economic environment.
Thereby the easing of interest rates, improving external sector performance coupled with reductions in fuel and electricity pricing witnessed during 2H2014 are likely to stand as a steady platform for improving performance of listed corporates in the year 2015.
Nevertheless the presidential election announced in November 2014 stalled the market momentum while investors were wanting to ride off the uncertainty. The presidential polls which would take place on 8th January 2015 is likely to be a closely fought battle. Also with a shift in parliamentary support towards the opposition having taken affect as at end 2014 the intensity is further increased. However with both candidates making strong reference to economic growth and expected to follow free market strategies the overall economic outlook seems positive. If the incumbent, president Rajapaksa wins the election he is likely to continue the economic policies he practiced since 2010 and if the opposition wins they will have to better the incumbent presidents track record, at least that is what is mention in their election manifesto. Therefore there would be limited downside triggered by the election outcome while we remain bullish on the medium to long term market performance despite a period of lull in and around the presidential election week.
Hence we remain bullish on, John Keells Holdings, (JKH), Aitken Spence (SPEN), Hatton National Bank (HNB.N,HNB.X), , Seylan Bank – Non Voting (SEYB.X) and NDB Bank (NDB). Aitken Spence Hotel Holdings (AHUN), Richard Pieris and Company (RICH), Tokyo Cement (TKYO.N,TKYO.X), Royal Ceramics (RCL), Chevron Lubricants (LLUB), Hemas Holdings (HHL), Distilleries (DIST), Laugh Gas (LGL.N,LGL.X), Sunshine Holdings (SUN.N), Textured Jersey (TJL.N), Dialog Axiata (DIAL.N), Access Engineering (AEL.N).
Service sector dominated Sri Lankan economy grew 7.3% in 2013 despite challenging 1H13. However 1-3Q14 saw 7.7% growth led by construction, apparel and recovery in agriculture sector. Thereby we expect the economy to end the year with a GDP growth of 7.8%.
Annual average inflation remained in single digit level for the past 65 months ending 2014 with an inflation of 3.3%. Given the lower inflationary environment, interest rates continued to decline during 2014 where the prime lending rate stood at 6.3%. Despite the declining interest rates, credit growth was rather slow during 1H14. However credit demand showed signs of recovery recording 5.1% YoY in the month of October. Rupee against the US Dollar was stable at LKR130.0 levels during 2014 largely due to lower oil prices and recovery in exports.
During the first 10 months of 2014 exports grew 9.7% YoY. Recovery in European and US markets saw the apparel exports grew by 13.9% YoY. Further exports from the agriculture sub segment also grew 10.3% YoY. Import expenditure rose 7.3% YoY during the first 10 months of 2014 largely due to 16.7% YoY growth in fuel imports. Thereby the trade deficit widened 4.3% YoY which is c.9% of GDP. However with strong remittance growth and other financial and capital account investments drove the overall BOP to a surplus of USD1.7 bn during Jan-Oct 2014. Further gross official reserves stood at USD8.8 bn which is sufficient to finance 5.6 months worth of imports.
Continued efforts towards fiscal consolidation saw the budget deficit as a % of GDP brought down to 5.0% (expected) in 2014 from 5.9% 2013. Further government plans to bring it down further to 4.6% of GDP in 2015E. During 1-3Q2014 government revenue grew 6.0% YoY whereas government expenditure grew 3.7% YoY. Government expects to further simplify the tax structure thereby broadening the tax base. Further debt to GDP stood just above 80% in 2012 narrowed to 78% in 2013 and the country expects to bring it down below 75% level in the medium term.
After a dull 2013 the equity market rallied in 2014 to end the year with ASPI up 23%. Further average turnover levels (LKR1,411.0 mn) and trading volumes (66.8 mn) also picked up in 2014 whilst we saw a foreign net inflow of LKR21.6 bn . Construction, Banking, Finance & Insurance (BFI) and Telecommunication were the top performing sectors whilst the market witnessed 5 major transactions in JKH, ODEL, HHL, HPWR and EXPO. 4 companies made its debut on the Colombo bourse during 2014 raising LKR2.7 bn whilst 18 debenture issues were seen in the market raising LKR48.1 bn. Further corporate earnings also grew 17.5% YoY during 1-3Q2014 BFI and Diversified sectors.
The broader market is trading at an overall market PE of 14.9x four quarterly earnings while corporate earnings denote strong growth potential amidst the favourable economic environment.
Thereby the easing of interest rates, improving external sector performance coupled with reductions in fuel and electricity pricing witnessed during 2H2014 are likely to stand as a steady platform for improving performance of listed corporates in the year 2015.
Nevertheless the presidential election announced in November 2014 stalled the market momentum while investors were wanting to ride off the uncertainty. The presidential polls which would take place on 8th January 2015 is likely to be a closely fought battle. Also with a shift in parliamentary support towards the opposition having taken affect as at end 2014 the intensity is further increased. However with both candidates making strong reference to economic growth and expected to follow free market strategies the overall economic outlook seems positive. If the incumbent, president Rajapaksa wins the election he is likely to continue the economic policies he practiced since 2010 and if the opposition wins they will have to better the incumbent presidents track record, at least that is what is mention in their election manifesto. Therefore there would be limited downside triggered by the election outcome while we remain bullish on the medium to long term market performance despite a period of lull in and around the presidential election week.
Hence we remain bullish on, John Keells Holdings, (JKH), Aitken Spence (SPEN), Hatton National Bank (HNB.N,HNB.X), , Seylan Bank – Non Voting (SEYB.X) and NDB Bank (NDB). Aitken Spence Hotel Holdings (AHUN), Richard Pieris and Company (RICH), Tokyo Cement (TKYO.N,TKYO.X), Royal Ceramics (RCL), Chevron Lubricants (LLUB), Hemas Holdings (HHL), Distilleries (DIST), Laugh Gas (LGL.N,LGL.X), Sunshine Holdings (SUN.N), Textured Jersey (TJL.N), Dialog Axiata (DIAL.N), Access Engineering (AEL.N).
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