Equity Market For the Quarter Ending 31st March 2017
The Colombo Stock exchange has closed negative for the quarter ending 31st March 2017 with the bench mark All share price index (ASPI) has declined by -2.67% and the more liquid S&P SL 20 Index has declined by — 1.65%.
In addition to that, Market Price Earning Ration (MPER) and Market Price to Book Value (MPBV) also has declined by -4.04% and -4.93% for the quarter respectively. Apart from that, there is a drop-in market capitalization for this quarter by -3.01%.
Measures taken by the US Federal Reserve on 01st February 2017 as not to increase its key interest rates was viewed as a short term positive for the Sri Lankan stock market in January 2017 which was resulted slight upward trend of ASPI & S&P SL 20.
Positive investors’ sentiment was likely driven by fitch ratings revision of Sri Lanka’s Outlook to stable from negative, coupled with strong 3Q17/4Q2016 earnings reported by a majority of blue chip stocks. That caused to have a slight upward movement in February 2017 of the stock market.
Further, there was dampened result in early March 2017 due to negative investor’s sentiments as a result of continuing rise in interest rate.
However, the ASPI & S&P SL 20 have recorded a slight recovery during the later half of the month amidst increased market activity prior to the end of the financial year for a majority of stocks trading on the CSE.
These trends have captured through Market Capitalization & Price Earnings Ratio over the three months as presented in below table.
Turnover & foreign net flow
The monthly turnover has fluctuated over last 6 months period. As per the analysis, the domestic turnover was at 63% in October & November 2016 which had being higher than the foreign turnover. However, the foreign turnover had contributed by 70% for total turnover in December 2016.
Then, foreign turnover has dropped to 47%, 45% & 54% in January, February & March 2017 respectively due to lack of transparency & lack of strength in the economy policies of the SL government resulted low attraction of foreign investors towards share market investments.
It is noted that, there was a net foreign cash outflow for the quarter ending December 2015 & same condition was prevailed for Q1 2016 & Q2 2016 due to reallocation of investments in the less volatile US Securities offering positive returns & weak macroeconomic fundamentals had been prevailed in SL. However, this has turned to net cash inflow in Q3 2016 onward due to rupee depreciation over the period & share prices had been undervalued in SL share market.
As such, foreign investors have absorbed this opportunity with the intention of making high capital gain in future.
Outlook for 2017
Currently the stock market is experiencing a downward trend & it is forecasted to drop ASPI to 5920 in next 3 quarters in 2017.
It is very difficult to attract foreign investors towards SL Share market due to have a prolonged global recession which is looming in 2017 to 2019 as per the new market conditions. Apart from that, foreign investments have been injecting to East Asia rather than the West Asia, especially in emerging economies like India & China (Easternization).
In addition to that, there will be an upward tendency of interest rate for forthcoming period in Sri Lanka to compensate the US federal interest rate & to retain the foreign investors from investing over the emerging markets which has prudent by recent CBSL ‘s policy decision of interest rate increased by 25bps in March 2017.
As such, Investors could invest over the fixed income sources, such as Government securities & Fixed deposits instead of share market investment since fixed income sources would offer better returns in times of uncertainty.
Further, there will be a negative impact over the bottom line of the corporates’ due to removal of most of the tax exemptions & incentives coupled with implementation of high tax rates under the budget proposal 2017.
This will further worse through high borrowing cost resulting at upward interest rate for forthcoming period. The net impact will fall share prices due to negative investor’s sentiment towards corporates’’ performance , that could hamper businesses’ ability to raise finance on the stock market. However, the research findings are subjected to modify based on the future market conditions.