It said, refuting the general opinion that foreign investors tend to exit the Bourse during a decline, that net foreign buying has accelerated on an YTD basis with foreign investors buying on weakness (see chart) when net foreign buying with the ASPI’s performance is juxtaposed.
“Given the medium to longer term investment horizon of most FIIs, we believe this trend is likely to continue going forward with foreign investors expected to continue to cherry pick quality stocks on price weakness,” DNH said. “Although we do admit that net foreign buying in emerging markets have declined significantly this year, mainly due to relatively stronger performances in selected developed markets (and fears that the Federal Reserve could start taping its bond-purchasing stimulus), foreign activity indicates signs of recovering, with most frontiers/EMs reporting positive foreign inflows on a MTD basis,” the broking firm added.
While the size of the market certainly has an impact with regard to absorbing foreign fund flows, comparing net foreign buying (NFP) with market capitalisation, DNH said it was encouraging to note the NFP/market cap ratio appears highest for Sri Lanka compared to other frontiers/EMs.
With Sri Lanka’s macroeconomic and corporate fundamentals expected to strengthen going forward, DNH expects the ratio to increase, further corroborating the foreign confidence in the Sri Lankan Bourse. (Ratio is negative for South Korea, Vietnam, Indonesia and India where net foreign buying has been negative on MTD basis).
Focusing on local investor sentiments, DNH said confidence appears sluggish. “With no structural problems evident in the Sri Lankan economy, it is very hard to ignore a bourse that consists of some of the most resilient and best performing companies in the region,” it added.
Supported by the Sri Lankan rupee’s depreciation, foreign investors have been net buyers on an YTD basis although local investor sentiment has been dented over the past few months largely due to the lack of available short term market opportunities.
“With a market cap to GDP at below 30%, well below that of global peers, we strongly urge domestic investors to avoid unrealistic short term expectations and focus on buying quality stocks on price weakness for medium to longer term sustainable returns,” DNH opined.
Commenting on market’s future trajectory, the broker said with 2Q2013 results trickling into the market, it expects the Bourse to inch upwards with the release of blue chip counters that are expected to report firm earnings growth.
“With several of these stocks currently trading on attractive valuations, we see little excuse for bottom up investors to enter the market and advise them to however, restrict their exposure to quality positions. While equity investors have been hit relatively hard over the past couple of months, which has taken attention away from blue chip heavyweight and middleweight counters, we believe the window to invest is now open for those willing to choose an alpha driven approach. In this respect, we wish to emphasise that stock selectivity will determine the winners from the losers,” DNH said.
“While the domestic structural story appears largely intact, our advice to investors is to build a portfolio of the most compelling companies in the ASPI that will not only benefit fully from the current macroeconomic conditions, but will also outperform on a sustainable basis in the medium to longer term,” DNH added.