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By Hasitha Premaratne
The market fell 21 points in July and a further 90 points in early August, as average daily turnover dropped more than 50 per cent to Rs. 424 million in July, in comparison to June. The weak economic environment and lack of major market-moving news left investors directionless, as the All Share Price Index (ASPI) fluctuated in a narrow range and couldn’t advance beyond the 5,000-point level. Over the last 12 months, the ASPI has fallen 27.8 per cent and market capitalisation dipped Rs. 555 billion or by 22.7 per cent. While market value eroded sharply, the market Price Earnings Ratio (PER) touched 13.5 times, from 21.6 times a year ago. Both PER and Price to Book Ratio (PBR) slipped by over 35 per cent, and prices fell amid earnings and book values of companies holding their ground. Furthermore, businesses continue to maintain similar dividends to a year earlier, thus the market dividend yield improved by 79 per cent to 2.5 per cent.
AGGRESSIVE OPTIONS
Overall market statistics show that there are selected counters which offer attractive rates, with lower PERs and PBRs which are below market valuations. These stocks are likely to readjust at a time when market sentiment turns positive – and offer attractive returns in excess of current fixed-income rates. During the last 12 months, most listed stocks dropped by almost 30 per cent (in line with the market as a whole). The exceptions are Commercial Bank non-voting counters and JKH, which dipped by only 4.1 and 5.2 per cent respectively. The Commercial Bank non-voting counter has been trading at a PER of six times, which may have been helping it to hold ground, while JKH has been well supported by foreign investors who have bargain-hunted the stock whenever it falls below 12 times PER levels. On the other hand, CIC and Tokyo Cement have fallen in excess of the ASPI, and this could be due to sector-specific issues, especially an anticipated slowdown in construction activity, coupled with a depreciating rupee. Either way, these counters have fallen to attractive price levels and are projected to maintain profitability or improve further. Therefore, when the general sentiment improves, these stocks are likely to reflect upside. Moreover, these companies are fundamentally strong, thus appearing to be reasonable to hold in the medium to long term – even if the market doesn’t take off in the next six months.
DEFENSIVE OPTIONS
While a majority of the stocks took a beating over the last 12 months, a few have outperformed the market and improved from their July price-points. Ceylon Tobacco shines under difficult times and offers an exceptional return of 81 per cent. Despite the price appreciation, it increased its dividend per share to maintain the dividend yield at six per cent levels. Similar scenarios are seen with Nestlé Lanka and Chevron Lubricants – both declared healthy dividend yields and are controlled by foreign shareholders. Due to this phenomenon, investors look at stocks as defensive investment options, where reasonable returns are offered irrespective of market conditions. Lion Brewery’s demand isn’t generally affected by economic conditions. It’s seen its share price improving from a year ago. With a strategic foreign partner and the majority shares held by a local company, Lion Brewery exceeded market returns during difficult times and came out as a defensive investment option. But these counters may not appreciate significantly in a bullish market – they are likely to be steady over a period of time.
MIXED PORTFOLIO
In difficult times, investors should focus the weight of their investment portfolios on different investment instruments. Exposure to equity may be around 30 per cent in the current environment, with the ability to convert short-term, fixed-income instruments as and when market sentiment turns positive. In a bullish market, the weightage in the equity portfolio towards defensive stocks may drop to 25-30 per cent. But when market sentiment turns bearish, exposure to defensive stocks should increase to at least 50 per cent. This may be due to downsizing overall equity portfolios or picking up additional stocks from the defensive list.
http://lbt.lk/stock-market/analysis/3383-stock-picking-in-tough-times
The market fell 21 points in July and a further 90 points in early August, as average daily turnover dropped more than 50 per cent to Rs. 424 million in July, in comparison to June. The weak economic environment and lack of major market-moving news left investors directionless, as the All Share Price Index (ASPI) fluctuated in a narrow range and couldn’t advance beyond the 5,000-point level. Over the last 12 months, the ASPI has fallen 27.8 per cent and market capitalisation dipped Rs. 555 billion or by 22.7 per cent. While market value eroded sharply, the market Price Earnings Ratio (PER) touched 13.5 times, from 21.6 times a year ago. Both PER and Price to Book Ratio (PBR) slipped by over 35 per cent, and prices fell amid earnings and book values of companies holding their ground. Furthermore, businesses continue to maintain similar dividends to a year earlier, thus the market dividend yield improved by 79 per cent to 2.5 per cent.
AGGRESSIVE OPTIONS
Overall market statistics show that there are selected counters which offer attractive rates, with lower PERs and PBRs which are below market valuations. These stocks are likely to readjust at a time when market sentiment turns positive – and offer attractive returns in excess of current fixed-income rates. During the last 12 months, most listed stocks dropped by almost 30 per cent (in line with the market as a whole). The exceptions are Commercial Bank non-voting counters and JKH, which dipped by only 4.1 and 5.2 per cent respectively. The Commercial Bank non-voting counter has been trading at a PER of six times, which may have been helping it to hold ground, while JKH has been well supported by foreign investors who have bargain-hunted the stock whenever it falls below 12 times PER levels. On the other hand, CIC and Tokyo Cement have fallen in excess of the ASPI, and this could be due to sector-specific issues, especially an anticipated slowdown in construction activity, coupled with a depreciating rupee. Either way, these counters have fallen to attractive price levels and are projected to maintain profitability or improve further. Therefore, when the general sentiment improves, these stocks are likely to reflect upside. Moreover, these companies are fundamentally strong, thus appearing to be reasonable to hold in the medium to long term – even if the market doesn’t take off in the next six months.
DEFENSIVE OPTIONS
While a majority of the stocks took a beating over the last 12 months, a few have outperformed the market and improved from their July price-points. Ceylon Tobacco shines under difficult times and offers an exceptional return of 81 per cent. Despite the price appreciation, it increased its dividend per share to maintain the dividend yield at six per cent levels. Similar scenarios are seen with Nestlé Lanka and Chevron Lubricants – both declared healthy dividend yields and are controlled by foreign shareholders. Due to this phenomenon, investors look at stocks as defensive investment options, where reasonable returns are offered irrespective of market conditions. Lion Brewery’s demand isn’t generally affected by economic conditions. It’s seen its share price improving from a year ago. With a strategic foreign partner and the majority shares held by a local company, Lion Brewery exceeded market returns during difficult times and came out as a defensive investment option. But these counters may not appreciate significantly in a bullish market – they are likely to be steady over a period of time.
MIXED PORTFOLIO
In difficult times, investors should focus the weight of their investment portfolios on different investment instruments. Exposure to equity may be around 30 per cent in the current environment, with the ability to convert short-term, fixed-income instruments as and when market sentiment turns positive. In a bullish market, the weightage in the equity portfolio towards defensive stocks may drop to 25-30 per cent. But when market sentiment turns bearish, exposure to defensive stocks should increase to at least 50 per cent. This may be due to downsizing overall equity portfolios or picking up additional stocks from the defensive list.
http://lbt.lk/stock-market/analysis/3383-stock-picking-in-tough-times
