Both indices dipped for the 6th consecutive week amidst relatively lower turnovers and volumes. The ASI shed 72.83 points WoW to close at 6,048.2 points (-1.2%), whilst the S&P SL20 Index lost 48.3 points WoW to close at 3,383.5 points (-1.4%). Indices dipped mainly on the back of the losses made by John Keells Holdings(-1.5% WoW),Dialog Axiata(-3.5% WoW), Sri Lanka Telecom (-2.7% WoW), Commercial Bank (-2.2% WoW) and Hatton National Bank(-3.5% WoW).
During the week, the policy decision taken by the Central Bank to cut the Statutory Reserve Ratio (SRR) by 200 bps came into effect on the 1st of July. Despite analyst fears, the LKR held steady within a narrow band as the Central Bank undertook open market operations and moral suasion in order to mop up liquidity. Despite the expected positive impact on equities arising from the monetary easing which is expected to lead to a drop in interest rates, investor sentiment was overwhelmed by the downgrade by Moody‟s of Sri Lanka‟s sovereign credit rating from Positive to stable which resulted in the market ending the week in the red. The report‟s negative outlook was further compounded by the disappointing fiscal data which has missed the income and expenditure goals set out by the government.
In addition a number of crossings were witnessed in Banking & Finance sector counters Including Commercial Bank, Nations Trust Bank & Janashakthi Insurance as well as in large cap counters such as Carsons Cumberbatch and Chevron Lubricants.
Furthermore, PC House, Central Investments & Finance, Janashakthi Insurance, Touchwood Investments and Nations Trust Bank topped the list in terms of volume traded during the week.
The week saw foreign purchases amounting to LKR 1,308.1 mn whilst foreign sales amounted to LKR 817.9 mn. Market capitalisation stood at LKR 2,322.8 bn, and the YTD performance is 7.2%.
The bourse slumps amidst concerns regarding LKR depreciation and rating outlook cut
Bourse trended upward during the first two days of this week, however it began to shed points from mid week possibly due to the concerns arising from the rating outlook cut by Moody‟s Investors service and the weakening of the LKR. Country faced this rate cut on the back of rising bank foreign debt, continuing budget deficit and high state borrowings which could weaken the external payments position. Nevertheless, the GOSL has taken measures to stabilise the external payments position since early last year whereby the foreign exchange reserves stabilised at USD 6.9bn as of April 2013. Meanwhile the data released by the Finance Ministry revealed that the State revenues and grants for 1H2013 fell c. 3.9% YoY to LKR509.4bn, whilst the expenditures rose c.3.3% YoY to LKR861.6bn with the budget deficit expanding 16% YoY to LKR352.2bn. Further, the rupee depreciated c. 0.16% WoW possibly owing to the foreign loans of the banking sector that are maturing during this month, however the depreciation was restricted owing to selective intervention by the CBSL.
With regard to market activities, large scale transactions supported by foreign and institutional investors on selected counters dominated the bourse, whilst retail interest was focused on few small cap counters. Foreign investors‟ position for the week reversed from last week‟s net out flow to a net foreign inflow of LKR490.2mn. Banking counters such as Nations Trust Bank continued to garner foreign interest throughout the week, whilst Commercial Bank and Carson Cumberbatch saw significant out flow during the week. However, we urge the investors to take positions in stocks from selected sectors which are likely to benefit from the recent changes in the macro environment. As discussed in our last weekly report, we are optimistic on the Banking sector following the SRR cut and the cut in policy rates, which is likely to bring down the market interest rates and boost the private sector credit growth. However, banks which have high exposure to gold backed loans are likely to be challenged by the declining gold prices. Further, companies involved in construction activities and companies involved in construction related activities are likely to benefit from the ongoing development activities and the possible drop in market rates which in turn boost private sector construction activity. While Manufacturing sector is likely to face challenges from the rise in energy costs, companies who have the ability to pass on the cost increase to end customers and the companies who have internalized their energy requirements are likely to outperform their peers in the sector.
Source: Asia Wealth Management Weekly review