NDB Stockbrokers in a special research report that is likely to move investor sentiments for the better is upbeat of a revival in the currently-bearish stock market as well as a rebound in corporate earnings from next year onwards.
Boldly titled ‘Emerging Bull in the World of Bears,’ the NDBS stated: “In view of the stabilising economic conditions, we remain positive on the profit growth prospects over the next two years.
While we estimate that currently the overall Sri Lankan market is trading at a forward P/E of 11x, we expect it to increase to 15x with the improvement in sentiment over the next two years.”
Recalling that in its previous review released in May a forecast was made that the bull run would commence from the latter part of 2012, NDBS said since then the ASI has gained 6% (from 5,048 to 5,331).
In line with the positive factors, “we maintain our ASPI target of 9,000 by end of 2014. However, the sentiment is likely to improve gradually and pick up steam by 2013H2 in view of the prevailing uncertainty in global economies and high domestic interest rates.”
Its latest report also predicted corporate profit growth to bounce back from 2013.
After two years of exceptional growth (of 75% and 25% respectively) in corporate profits, 2012 is seemingly a year of consolidation with profits remaining flat from previous year up to September.
NDBS expects the trend to continue till the rest of the year and accordingly revised downwards its previous profit growth expectation of 10% for 2012. However sectors such as banking, hotel, telecommunication and food and beverage have recorded appreciable profit growth, it noted.
“We maintain our expectation that the profits would bounce back in 2013 and 2014, to record a growth of 20% and 15% respectively. This is in view of the improving economic stability resulting from the measures taken in 2012H1,” NDBS said.
Emphasising on attractive valuations, the broking firm said Sri Lankan equities were attractively priced compared to regional emerging/frontier markets.
“While according to our estimates the Sri Lankan stocks are trading at a forward P/E of 11x, the regional markets are trading at a forward P/E of 12.8x. With the expected improvement in profitability and economic stability over the next two years, we maintain our expectation that the forward P/E would reach 15x with improving investor sentiment,” NDBS pointed out.
It implied that attractive valuations as well as future upside in relation to regional peers were key reasons for record net foreign inflow into Sri Lankan equities so far this year.
“The foreign investors have been bullish on Sri Lankan equities since early 2012, with net foreign inflows to the stock market reaching Rs. 33 billion up to October,” NDBS said.
As of last week, as reported by the Daily FT, the net inflow had crossed the Rs. 37 billion mark. This is in comparison to net foreign outflows of Rs. 26 billion and Rs. 19 billion in 2010 and 2011 respectively.
“This indicates that the value investors perceive upside potential in Sri Lankan equities in view of positive policy measures taken in 2012 and the prospects of impressive growth over the next few years,” NDBS said.
Noting that demand for equities was quietly accumulating whilst supply was slowing down, the broking firm said Initial Public Offerings (IPOs) and secondary equity issues (rights issues, etc.) by listed companies had slowed down in 2012 compared to 2010 and 2011.
As a result, NDBS said the investable funds within the economy have been accumulating and have been directed to short-term fixed income instruments to a large extent, in view of the relatively-high interest rates. In addition, with the increase in interest rates and triggering of margin calls, the utilisation of margin trading (leverage) would have reduced significantly over the last 12 months.
“We feel the equity selling pressure has been reducing substantially over the last 12 months. Simultaneously, the investable funds have been accumulating, which could flow into the equity market if the interest rates come down (including an increase in margin trading activity) or any other event occurs that could boost the sentiment of the equity market,” NDBS added.