Although Sri Lanka’s equity market was a laggard among regional peers last year, the Bourse is expected to witness gains this year on the back of relatively attractive valuations offered by select stocks and superior earnings growth prospects, an outlook report by a local brokerage firm has stated.
According to the Sri Lanka Outlook 2018 Report published by CT CLSA Securities (Pvt) Ltd, while the Sri Lankan market trades at a discount to a majority of regional peers such as South Korea, Singapore, Hong Kong, Malaysia, Japan, China, Thailand, Vietnam and India, there are attractive valuations particularly in banking, construction, export related and consumer sectors.
“The forward market valuation of 9.6 times for 2018E is at a discount to regional peers, on the back of an expected earnings growth of 6% YoY this year,” the report highlighted.
The Sri Lankan stock market witnessed a recovery last year, subsequent to two consecutive years of decline, with the ASI and S&P SL20 rising by 2% and 5% respectively in contrast to declines of 10% and 4% in 2016.
Average daily turnover witnessed a rise to US $6mn in 2017 compared to US$ 5mn in 2016, on the back of several foreign funds increasing their Sri Lanka specific allocations in the first half of 2017.
“Positive market sentiment has largely been driven by increased foreign buying in key blue-chip stocks, especially in Banking and Finance, coupled with greater consistency in macroeconomic policy followed by fiscal tightening measures implemented by the government,” analysts said.
According to statistics, foreigners were net buyers in 2017, with a net inflow of US$ 121mn compared to a meager inflow of US $13mn in 2016. Consequently, foreign participation as a percentage of total market turnover increased to 47% in 2017 (vs. 42% in 2016) “The GoSL has set its sights on attracting US$50bn worth of investment over the next five to ten years, and is focused on accessing larger markets through free trade agreements with India, China and Singapore.
“The Megapolis development project, the Colombo Port City and the Hambantota Logistics and Industrial Zone projects are expected to open up greater investment opportunities for domestic and foreign investors. The GoSL has also called for a request for proposal (RFP) to find investors for two State-owned hotels, Grand Hyatt Colombo and Hilton Colombo, with potential partial listings of other SOEs also in the pipeline,” the report further outlined.