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Four leading analysts who advised investors last year are back to update their forecast options
LBR,Thursday 01 March 2012
Building an investment portfolio last year was fraught with challenges. The stock market’s lunacy by mid 2011 and regulatory folly in the face of rampant market manipulation scared away serious portfolio managers here and abroad.
Last year LBR asked four leading market analysts’ to advice an investor building a portfolio with a three year outlook. Stocks returns have comfortably outperformed fixed income over the long term and they also cover investors against the risk of inflation.
So this year we went back to them to see what other advice they had because the market at 5,900 levels (when we went to print) is 8% below its level at the time the original forecasts were made one year ago.
It’s possible that investors, who didn’t significantly trim their equity portfolios mid last year lost money in stocks. They now have to decide if stocks will turnaround this year or should they be overweight on treasuries, a good bet during downturns. In the US, treasuries have returned a positive 10% during recessions (not that anybody is predicting one in Sri Lanka for 2012) against stocks which have lost around 15% of their value, given that inflation remains low. Sri Lanka’s inflation, though low compared to its own dismal past record, would still make foreign portfolio investors uncomfortable. We put these questions to the four analysts: Amal Sanderatne, Chief Executive of Frontier Research, Leo Fernando, Vice President, Research, at private equity firm LR Global, Waruna Singappuli who heads the research unit at NDB Stockbrokers and former equity analyst Hasitha Premaratne CFO of Brandix Lanka.
Leo Fernando
1. What is your forecast one year forward PE? Forecast earnings growth for 2012/13?
In FY13 some of the listed company earnings may grow at around 2.5 to 3x of GDP, hence we may be looking at a cumulating earnings growth of around 20% yoy in FY12/13. Currently the market is trading at about 12x delivered earnings; hence my one year forecast PE would be in the range of 10 times.
2. Would you make a greater/ lesser allocation for equity in a portfolio now than you did a year ago? Why?
Given that some of the corporates in my early earnings visibility sectors are trading at attractive valuations, I would like to overweight some of my company allocations. However, I would keep the overall equity allocation unchanged or marginally reduced, since of the key macro risks I mentioned last year (i.e: low savings as % of GDP ratio) may start to take its toll on interest rates. In the absence of any significant market catalyst, I would just focus on tactical allocation.
3. How do bonds figure in your ideal portfolio? Consider that real returns on bonds are still pretty low.
With the risk of interest rates increasing, I wouldn’t be for long bonds. I would look to gain my fixed income exposure using shorter duration money market instruments.
4. The market is more than 20% off its peak. Is it in your opinion fairly/ under/ overvalued? Are you overweight/ underweight on equity?
The market as a whole is trading on bear market multiples and one could argue it is over-valued for bear market territory. Last year I mentioned that the next phase of the market is going to be based on alpha plays. You may not have been a pump and dump victim, if you just stuck with fundamentals. Even though the market was down 12% in the last twelve months some sectors like F&B, White Goods & Automobile delivered c.30% plus returns in the last twelve months. If you flip through some of the valuation sheets produced by the brokering community, you can pick some attractively priced stocks. I would overweight attractively priced stocks with a good story while holding my overall equity allocation until I get further clarity on some of my macro risks.
5. Outlook for the global economy has deteriorated significantly since we last met. Has that led any of you to adjust your medium term outlook for Sri Lankan equity?
Deterioration of the global economy is a concern, since risk aversion has increased and sourcing foreign capital is going to be challenging. However, Sri Lanka has some unique economic growth drivers when compared with some of its regional peers and with the correct positioning we may be able to attract some long term investment money. I like companies with relatively low leverage providing exposure to the capacity building sectors over companies that are highly levered or giving me exposure to European or US trade.
6. Are there any other factors that have led you to be more/ less optimistic about Sri Lankan equities than a year ago?
Regulation has become a wild card and no more a tail risk. Regulatory risks have started to rank higher in your screening process. It should be highlighted that, all regulation implemented in the last year hasn’t been negative, but the manner in which some of it was implemented may have dented business sentiments.
7. You were all generally apprehensive about the risk of inflation in 2011, has that risk somewhat abated now?
I see greater inflationary pressures in 2012 than in 2011. In the absence of significant foreign investments or inward remittances in 2012, we may see some depreciation pressure on the rupee. Also, I would keep a close eye on the strategies adopted to fund public and corporate credit demand.
Waruna Singappuli
1. What is your forecast one year forward PE? Forecast earnings growth for 2012/13?
The overall market is currently trading around 12.5 – 13.0 times based on my expectation of 2011/12 results. I expect the earnings to grow by around 30% in 2011/12 in normalized terms. I think 25% growth could be expected for 2012/13. Accordingly based on expected earnings for 2012/13 the overall market is trading at 10.0 – 11.0 times. I think the market is under-valued. Ideally it should trade around 14.0 times based on 2011/12 results (i.e, ASPI around 7000).
2. Would you make a greater/ lesser allocation for equity in a portfolio now than you did a year ago? Why?
As I mentioned last year, excessive speculation was becoming a concern in 2010. But it intensified in the first half of 2011 and reached unbelievable heights around August. So I would have reduced the allocation to equity during the first half of 2011. However now that prices have fallen, I would accumulate slowly over the next 3 – 6 months and bring the allocation up to the levels I had in December 2010.
3. How do bonds figure in your ideal portfolio? Consider that real returns on bonds are still pretty low.
I wouldn’t be too bullish on bonds. Interest rates could inch up a bit more which would affect bond prices. But I would want to be in short term fixed income (treasury bills).
4. The market is more than 20% off its peak. Is it in your opinion fairly/ under/ overvalued? Are you overweight/ underweight on equity?
It is undervalued as a whole, but it could come down further since there are shares which are still overvalued. I would be underweight on equity now. But I would look to be fair weight over the next 3 – 6 months.
5. Outlook for the global economy has deteriorated significantly since we last met. Has that led any of you to adjust your medium term outlook for Sri Lankan equity?
Yes, I’m less bullish than I was a year ago. Although Sri Lanka isn’t directly exposed, we would still be affected to an extent.
6. Are there any other factors that have led you to be more/ less optimistic about Sri Lankan equities than a year ago?
Because of the excessive speculation in 2011 many investors lost money. Even with attractive valuations selling pressure could exceed buying for some time. I would revise my expectation of ASPI down to 9000 from 12000 previously. But it’s still 50% higher compared to the current level of 6000.
7. You were all generally apprehensive about the risk of inflation in 2011, has that risk somewhat abated now?
This was a pleasant surprise in 2011. I expected inflation to be a bigger threat than what it was in 2011. I’m less concerned about inflation for 2012. An increase in interest rates would be a greater concern.
8. Anything you want to add?
I would like to reiterate the potential in real estate. It has shown signs of improving in 2011. I think it’ll offer great potential over the next 5 years.
Amal Sanderatne
1. What is your forecast one year forward PE? Forecast earnings growth for 2012/13?
14-15 times one year forward PE. Zero or near zero growth in headline earnings in 2012/13 due to high earlier base which had a lot of positive non recurring impacts. High uncertainty on potential impact of the changeover to IFRS this year.
2. Would you make a greater/ lesser allocation for equity in a portfolio now than you did a year ago? Why?
Last year I said that the “allocation to equity would be extremely low compared to whatever the norm would be -considering the market is highly overvalued”
Compared to that I would advice a higher allocation to equity as valuations are improving.
3. How do bonds figure in your ideal portfolio? Consider that real returns on bonds are still pretty low.
One year back in the previous interview, I said interest rates would pick up 200-400 basis points. As such I advised against investing in long terms bonds. Investors would be locked into the low interest rates at the time. They are exposed to capital losses as bond prices fall when interest rates rise. Being very bearish both equity and bonds, I felt it was best to stay in short term cash.
Since the interview, from the middle of 2011 I have been taking a more positive near term view on the inflation outlook for Sri Lanka. This improves the potential real returns on bonds
Last year in Jan 2011 I said “I believe in one year you will have the opportunities. I think it will start in bonds”
This timing seems to be on track as in the last two months long term bond rates have jumped over 200 basis points, opening an opportunity.
Though there is a high degree of uncertainty around the near term rates outlook, on a risk adjusted basis for most investors, overweight on long terms bonds would be better than equity.
However the advice at the moment for the typical investor is to invest in long bonds on a NON leveraged basis. Given the exchange rate uncertainty and the risk of potential sales by foreign investors of their holdings in TBonds, it is still too risky to invest aggressively in bonds on a leveraged basis.
4. The market is more than 20% off its peak. Is it in your opinion fairly/ under/ overvalued? Are you overweight/ underweight on equity?
If you take the overall market as represented by the ASPI, it is still overvalued though less than earlier.
Though many of the pumped up less liquid counters have fallen, they are far above any reasonable valuation. Therefore this segment of the market has a lot more to correct. Given their influence, if you take the market as a whole as represented by the ASPI, it does not look attractive.
However many of the more liquid blue chips have fallen close to what I would consider fair value. Some are even significantly undervalued.
Though it is too early to be bullish or overweight, we are advising investors to progressively take a neutral position on the liquid blue chips with cash we asked them to hold.
5. Outlook for the global economy has deteriorated significantly since we last met. Has that led any of you to adjust your medium term outlook for Sri Lankan equity?
I believe last year I said the “final point I want to leave is that I’m extremely worried about the global economy, China, Europe etc and that is the biggest risk that can derail our growth story.” The global economic slowdown therefore was incorporated in my bearishness. Thus it does not change my ASPI index target of 7000 which is now two years in the future. Investors in the ASPI overall would therefore still only get around the risk free rate while still having market risk and volatility.
6. Are there any other factors that have led you to be more/ less optimistic about Sri Lankan equities than a year ago?
Near term currency risk is greater.
7. You were all generally apprehensive about the risk of inflation in 2011, has that risk somewhat abated now?
Inflation is better. The risk is, currency fears leading to foreign bond holders selling and the rupee crashing by greater than 10%, which could again spark inflation.
8. Anything you want to add?
To get really aggressive a greater market decline may be necessary. Unlike last year when I was very bearish and highly underweight on equity, a neutral view/position is what we take now.
Hasitha Premaratne
1. What is your forecast one year forward PE? Forecast earnings growth for 2012/13?
I am looking at 20% growth in earnings and a forward PE of 12.9x
2. Would you make a greater/ lesser allocation for equity in a portfolio now than you did a year ago? Why?
I will maintain it around 30% - 35% in equities and look to gradually accumulate fundamentally sound counters. This allocation is mostly in line with what I expected a year ago. There is no major shift from equity exposure. But within the portfolio, it is good to exit some stocks even at a loss if they are bought at high valuations and then re-enter fundamentally sound counters which are now below 10x forward multiples.
3. How do bonds figure in your ideal portfolio? Consider that real returns on bonds are still pretty low?
Bonds would be at 15% max but short term bills would comprise a larger portion of the portfolio. I would expect another 1% - 2% point rise in rates, thus this would be an appropriate time to increase the exposure into long dated bonds
4. The market is more than 20% off its peak. Is it in your opinion fairly/ under/ overvalued? Are you overweight/ underweight on equity?
I would not look at the ASPI and make a comment on the market valuations. ASPI is still influenced by price jumps of rumor driven speculative stocks. Perhaps Milanka Index maybe a better index to take a call. I feel Milanka Index, which represent more liquid blue chips is now undervalued. There are stocks picking opportunities at this stage than looking to take a bet on the Index. I also expect the MPI to outperform the ASPI in the next 12 months.
5. Outlook for the global economy has deteriorated significantly since we last met. Has that led any of you to adjust your medium term outlook for Sri Lankan equity?
Yes. Europe is a big concern at this stage. If the US retail market doesn’t pick up it could have an impact on China’s growth rates. If the Chinese Economy slows down sharply, it will hurt the entire global economy, including Sri Lanka. Sri Lankan equities do have some exposure to the global scenario.
6. Are there any other factors that have led you to be more/ less optimistic about Sri Lankan equities than a year ago?
I think the Sri Lankan growth story still remains intact. There may be somewhat of an impact from the global outlook but overall I would continue to bet on selected companies and take 2 to 3 year positions, looking at earnings growth potential.
7. You were all generally apprehensive about the risk of inflation in 2011, has that risk somewhat abated now?
Given the commodity prices eased off faster than expected imported inflation has settled down. However oil prices still remain volatile and with no further political tension in the middle-east, oil prices should not significantly move up. Inflation is likely to stay close to double digits next year.
http://www.lbr.lk/fullstory.php?nid=201203011558535293
LBR,Thursday 01 March 2012
Building an investment portfolio last year was fraught with challenges. The stock market’s lunacy by mid 2011 and regulatory folly in the face of rampant market manipulation scared away serious portfolio managers here and abroad.
Last year LBR asked four leading market analysts’ to advice an investor building a portfolio with a three year outlook. Stocks returns have comfortably outperformed fixed income over the long term and they also cover investors against the risk of inflation.
So this year we went back to them to see what other advice they had because the market at 5,900 levels (when we went to print) is 8% below its level at the time the original forecasts were made one year ago.
It’s possible that investors, who didn’t significantly trim their equity portfolios mid last year lost money in stocks. They now have to decide if stocks will turnaround this year or should they be overweight on treasuries, a good bet during downturns. In the US, treasuries have returned a positive 10% during recessions (not that anybody is predicting one in Sri Lanka for 2012) against stocks which have lost around 15% of their value, given that inflation remains low. Sri Lanka’s inflation, though low compared to its own dismal past record, would still make foreign portfolio investors uncomfortable. We put these questions to the four analysts: Amal Sanderatne, Chief Executive of Frontier Research, Leo Fernando, Vice President, Research, at private equity firm LR Global, Waruna Singappuli who heads the research unit at NDB Stockbrokers and former equity analyst Hasitha Premaratne CFO of Brandix Lanka.
Leo Fernando
1. What is your forecast one year forward PE? Forecast earnings growth for 2012/13?
In FY13 some of the listed company earnings may grow at around 2.5 to 3x of GDP, hence we may be looking at a cumulating earnings growth of around 20% yoy in FY12/13. Currently the market is trading at about 12x delivered earnings; hence my one year forecast PE would be in the range of 10 times.
2. Would you make a greater/ lesser allocation for equity in a portfolio now than you did a year ago? Why?
Given that some of the corporates in my early earnings visibility sectors are trading at attractive valuations, I would like to overweight some of my company allocations. However, I would keep the overall equity allocation unchanged or marginally reduced, since of the key macro risks I mentioned last year (i.e: low savings as % of GDP ratio) may start to take its toll on interest rates. In the absence of any significant market catalyst, I would just focus on tactical allocation.
3. How do bonds figure in your ideal portfolio? Consider that real returns on bonds are still pretty low.
With the risk of interest rates increasing, I wouldn’t be for long bonds. I would look to gain my fixed income exposure using shorter duration money market instruments.
4. The market is more than 20% off its peak. Is it in your opinion fairly/ under/ overvalued? Are you overweight/ underweight on equity?
The market as a whole is trading on bear market multiples and one could argue it is over-valued for bear market territory. Last year I mentioned that the next phase of the market is going to be based on alpha plays. You may not have been a pump and dump victim, if you just stuck with fundamentals. Even though the market was down 12% in the last twelve months some sectors like F&B, White Goods & Automobile delivered c.30% plus returns in the last twelve months. If you flip through some of the valuation sheets produced by the brokering community, you can pick some attractively priced stocks. I would overweight attractively priced stocks with a good story while holding my overall equity allocation until I get further clarity on some of my macro risks.
5. Outlook for the global economy has deteriorated significantly since we last met. Has that led any of you to adjust your medium term outlook for Sri Lankan equity?
Deterioration of the global economy is a concern, since risk aversion has increased and sourcing foreign capital is going to be challenging. However, Sri Lanka has some unique economic growth drivers when compared with some of its regional peers and with the correct positioning we may be able to attract some long term investment money. I like companies with relatively low leverage providing exposure to the capacity building sectors over companies that are highly levered or giving me exposure to European or US trade.
6. Are there any other factors that have led you to be more/ less optimistic about Sri Lankan equities than a year ago?
Regulation has become a wild card and no more a tail risk. Regulatory risks have started to rank higher in your screening process. It should be highlighted that, all regulation implemented in the last year hasn’t been negative, but the manner in which some of it was implemented may have dented business sentiments.
7. You were all generally apprehensive about the risk of inflation in 2011, has that risk somewhat abated now?
I see greater inflationary pressures in 2012 than in 2011. In the absence of significant foreign investments or inward remittances in 2012, we may see some depreciation pressure on the rupee. Also, I would keep a close eye on the strategies adopted to fund public and corporate credit demand.
Waruna Singappuli
1. What is your forecast one year forward PE? Forecast earnings growth for 2012/13?
The overall market is currently trading around 12.5 – 13.0 times based on my expectation of 2011/12 results. I expect the earnings to grow by around 30% in 2011/12 in normalized terms. I think 25% growth could be expected for 2012/13. Accordingly based on expected earnings for 2012/13 the overall market is trading at 10.0 – 11.0 times. I think the market is under-valued. Ideally it should trade around 14.0 times based on 2011/12 results (i.e, ASPI around 7000).
2. Would you make a greater/ lesser allocation for equity in a portfolio now than you did a year ago? Why?
As I mentioned last year, excessive speculation was becoming a concern in 2010. But it intensified in the first half of 2011 and reached unbelievable heights around August. So I would have reduced the allocation to equity during the first half of 2011. However now that prices have fallen, I would accumulate slowly over the next 3 – 6 months and bring the allocation up to the levels I had in December 2010.
3. How do bonds figure in your ideal portfolio? Consider that real returns on bonds are still pretty low.
I wouldn’t be too bullish on bonds. Interest rates could inch up a bit more which would affect bond prices. But I would want to be in short term fixed income (treasury bills).
4. The market is more than 20% off its peak. Is it in your opinion fairly/ under/ overvalued? Are you overweight/ underweight on equity?
It is undervalued as a whole, but it could come down further since there are shares which are still overvalued. I would be underweight on equity now. But I would look to be fair weight over the next 3 – 6 months.
5. Outlook for the global economy has deteriorated significantly since we last met. Has that led any of you to adjust your medium term outlook for Sri Lankan equity?
Yes, I’m less bullish than I was a year ago. Although Sri Lanka isn’t directly exposed, we would still be affected to an extent.
6. Are there any other factors that have led you to be more/ less optimistic about Sri Lankan equities than a year ago?
Because of the excessive speculation in 2011 many investors lost money. Even with attractive valuations selling pressure could exceed buying for some time. I would revise my expectation of ASPI down to 9000 from 12000 previously. But it’s still 50% higher compared to the current level of 6000.
7. You were all generally apprehensive about the risk of inflation in 2011, has that risk somewhat abated now?
This was a pleasant surprise in 2011. I expected inflation to be a bigger threat than what it was in 2011. I’m less concerned about inflation for 2012. An increase in interest rates would be a greater concern.
8. Anything you want to add?
I would like to reiterate the potential in real estate. It has shown signs of improving in 2011. I think it’ll offer great potential over the next 5 years.
Amal Sanderatne
1. What is your forecast one year forward PE? Forecast earnings growth for 2012/13?
14-15 times one year forward PE. Zero or near zero growth in headline earnings in 2012/13 due to high earlier base which had a lot of positive non recurring impacts. High uncertainty on potential impact of the changeover to IFRS this year.
2. Would you make a greater/ lesser allocation for equity in a portfolio now than you did a year ago? Why?
Last year I said that the “allocation to equity would be extremely low compared to whatever the norm would be -considering the market is highly overvalued”
Compared to that I would advice a higher allocation to equity as valuations are improving.
3. How do bonds figure in your ideal portfolio? Consider that real returns on bonds are still pretty low.
One year back in the previous interview, I said interest rates would pick up 200-400 basis points. As such I advised against investing in long terms bonds. Investors would be locked into the low interest rates at the time. They are exposed to capital losses as bond prices fall when interest rates rise. Being very bearish both equity and bonds, I felt it was best to stay in short term cash.
Since the interview, from the middle of 2011 I have been taking a more positive near term view on the inflation outlook for Sri Lanka. This improves the potential real returns on bonds
Last year in Jan 2011 I said “I believe in one year you will have the opportunities. I think it will start in bonds”
This timing seems to be on track as in the last two months long term bond rates have jumped over 200 basis points, opening an opportunity.
Though there is a high degree of uncertainty around the near term rates outlook, on a risk adjusted basis for most investors, overweight on long terms bonds would be better than equity.
However the advice at the moment for the typical investor is to invest in long bonds on a NON leveraged basis. Given the exchange rate uncertainty and the risk of potential sales by foreign investors of their holdings in TBonds, it is still too risky to invest aggressively in bonds on a leveraged basis.
4. The market is more than 20% off its peak. Is it in your opinion fairly/ under/ overvalued? Are you overweight/ underweight on equity?
If you take the overall market as represented by the ASPI, it is still overvalued though less than earlier.
Though many of the pumped up less liquid counters have fallen, they are far above any reasonable valuation. Therefore this segment of the market has a lot more to correct. Given their influence, if you take the market as a whole as represented by the ASPI, it does not look attractive.
However many of the more liquid blue chips have fallen close to what I would consider fair value. Some are even significantly undervalued.
Though it is too early to be bullish or overweight, we are advising investors to progressively take a neutral position on the liquid blue chips with cash we asked them to hold.
5. Outlook for the global economy has deteriorated significantly since we last met. Has that led any of you to adjust your medium term outlook for Sri Lankan equity?
I believe last year I said the “final point I want to leave is that I’m extremely worried about the global economy, China, Europe etc and that is the biggest risk that can derail our growth story.” The global economic slowdown therefore was incorporated in my bearishness. Thus it does not change my ASPI index target of 7000 which is now two years in the future. Investors in the ASPI overall would therefore still only get around the risk free rate while still having market risk and volatility.
6. Are there any other factors that have led you to be more/ less optimistic about Sri Lankan equities than a year ago?
Near term currency risk is greater.
7. You were all generally apprehensive about the risk of inflation in 2011, has that risk somewhat abated now?
Inflation is better. The risk is, currency fears leading to foreign bond holders selling and the rupee crashing by greater than 10%, which could again spark inflation.
8. Anything you want to add?
To get really aggressive a greater market decline may be necessary. Unlike last year when I was very bearish and highly underweight on equity, a neutral view/position is what we take now.
Hasitha Premaratne
1. What is your forecast one year forward PE? Forecast earnings growth for 2012/13?
I am looking at 20% growth in earnings and a forward PE of 12.9x
2. Would you make a greater/ lesser allocation for equity in a portfolio now than you did a year ago? Why?
I will maintain it around 30% - 35% in equities and look to gradually accumulate fundamentally sound counters. This allocation is mostly in line with what I expected a year ago. There is no major shift from equity exposure. But within the portfolio, it is good to exit some stocks even at a loss if they are bought at high valuations and then re-enter fundamentally sound counters which are now below 10x forward multiples.
3. How do bonds figure in your ideal portfolio? Consider that real returns on bonds are still pretty low?
Bonds would be at 15% max but short term bills would comprise a larger portion of the portfolio. I would expect another 1% - 2% point rise in rates, thus this would be an appropriate time to increase the exposure into long dated bonds
4. The market is more than 20% off its peak. Is it in your opinion fairly/ under/ overvalued? Are you overweight/ underweight on equity?
I would not look at the ASPI and make a comment on the market valuations. ASPI is still influenced by price jumps of rumor driven speculative stocks. Perhaps Milanka Index maybe a better index to take a call. I feel Milanka Index, which represent more liquid blue chips is now undervalued. There are stocks picking opportunities at this stage than looking to take a bet on the Index. I also expect the MPI to outperform the ASPI in the next 12 months.
5. Outlook for the global economy has deteriorated significantly since we last met. Has that led any of you to adjust your medium term outlook for Sri Lankan equity?
Yes. Europe is a big concern at this stage. If the US retail market doesn’t pick up it could have an impact on China’s growth rates. If the Chinese Economy slows down sharply, it will hurt the entire global economy, including Sri Lanka. Sri Lankan equities do have some exposure to the global scenario.
6. Are there any other factors that have led you to be more/ less optimistic about Sri Lankan equities than a year ago?
I think the Sri Lankan growth story still remains intact. There may be somewhat of an impact from the global outlook but overall I would continue to bet on selected companies and take 2 to 3 year positions, looking at earnings growth potential.
7. You were all generally apprehensive about the risk of inflation in 2011, has that risk somewhat abated now?
Given the commodity prices eased off faster than expected imported inflation has settled down. However oil prices still remain volatile and with no further political tension in the middle-east, oil prices should not significantly move up. Inflation is likely to stay close to double digits next year.
http://www.lbr.lk/fullstory.php?nid=201203011558535293
