Point of View
Equity markets continued to rally this week as positive earnings releases for the September quarter along with the election manifestos by main presidential candidates (which helped shed light on their future policy direction) boosted investor sentiment. The benchmark ASPI consequently gained ~97 points over the week (1.6 percent W-o-W) to cross the 6,000 mark, 2 weeks ahead of Election Day. Investor interest in CTC, DIAL, SLTL, and CARS collectively contributed 47 percent to the Index’s weekly gain, as ASPI hit a 10-month high this week to close at 6,032.08 points on Friday. This week’s rally contributed to the ~252 point (4.4 percent M-o-M) gain over October, which has subsequently pared down the YTD loss on the index to 0.3 percent cf. to 1.9 percent last week.
The positive momentum also led to a steady increase in turnover levels this week, with daily turnover touching a 6-week high of Rs. Rs.1.8Bn on Friday amid heavy local HNI and institutional buying interest in JKH and SEYB. Consequently, HNI and institutional participation improved this week, accounting for 31 percent (cf. 17 percent last week) of the market’s total turnover for the week. Crossings in banking sector stocks (SEYB, COMB, and SAMP) accounted for 44 percent of total crossings this week while heavy buying interest was also visible in JKH (38 percent of crossings), DIAL (12 percent of crossings), CINS and LION. Average daily turnover levels for the week consequently reached Rs.0.97Bn relative to last week’s average daily turnover of Rs.0.80Bn.
Meanwhile, despite the US Fed cutting rates for the 3rd time this year, foreign investors returned to a net selling position on the Colombo bourse this week as net outflows from domestic equities totaled ~Rs. 480Mn (cf. an inflow of Rs. 31Mn last week). The YTD net foreign outflow consequently increased to Rs. 4.5Bn from Rs.4.0Bn last week. Markets in the week ahead are likely to take direction both from ongoing September quarter earnings season and developments on the political front ahead of the Nov’16th Presidential elections.
Urban Inflation Edges Up
Sri Lanka’s urban inflation levels edged up slightly over October, rising to 5.4 percent Y-o-Y (cf. 5 percent Y-o-Y in Sept’19) due to the seasonality impact from food prices. Food prices (which are typically volatile) rose to 6.8 percent Y-o-Y in Oct’19, sharply higher than the 3.0 percent Y-o-Y in Sep’19.
However, Non food inflation over the month decreased to 4.8 percent Y-o-Y (from 5.7 percent Y-o-Y in Sep’19) helping keep overall inflation levels broadly in check. In a new report on Asia-Pacific (APAC) frontier market sovereigns meanwhile, Fitch ratings highlighted the rising divergence between Vietnam and its peers such as Sri Lanka, Mongolia & Pakistan.
The rating agency noted that compared to its APAC FM peers who have faced heightening external vulnerabilities, Vietnam has a ‘lengthening record of macroeconomic stability’ driven by strong FDIs (especially into the Manufacturing sector) and steady export growth.
Fitch noted further that while improving export performance would help Sri Lanka meet its heavy external debt repayments, the country’s exports as a percentage of its GDP over 2011-18 has fallen compared to peers such as Vietnam. The agency noted further that Sri Lanka’s policy environment has improved post the Oct’18 political crisis and that the recovery in tourism post the April’19 terror attacks have been faster-than-anticipated while near-term external and fiscal financing constraints have eased with the resumption of the country’s IMF program and sovereign bond issuance of $4.4Bn.
Fitch cautioned however that external debt service obligations remain high, as Sri Lanka’s external debt commitments over 2020-2023 are ~$19Bn compared to its foreign exchange reserves to $7.6Bn. Meanwhile, in a widely anticipated move, the US Fed cut policy rates for the 3rd time this year, reducing the benchmark funds rate by 25Bps to a range of 1.5-1.75 percent as growth in the world’s largest economy continues to slow amid ongoing trade disputes and weak global growth.
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