Positive earnings set to drive market this year

Renowned equity research consultant and former Head of Research HNB stockbrokers, Geeth Balasuriya talks to FEB on the present market drive...

Excerpts of the interview:

Colombo bourse has so far managed to maintain the growth momentum from last year. How do you view this?

What we saw last year was mainly a re-rating of market and sentiments driving the prices in the post-war scenario. What we are seeing now is a reaction to a possible surge in corporate earnings. So earnings are driving the indices high.

What is your current assessment of the market?
I think the market is fairly valued at the moment. Looking at the earnings potential, I anticipate a further upturn during the year.

Is the market still attractive?

When you consider attractiveness, it should be compared with other available investment opportunities for investors. At the moment the Fixed Deposits and Government securities are yielding returns of around 10% and I feel equities are a much better value proposition even after taking risk factors into account. However we saw indices moving very fast recently, and in my opinion the market cannot sustain this sort of a rally for too long. So, I’m not ruling out the possibility of temporary setbacks. Overall, the trend will be positive and investors who have a medium-term view are likely to make good returns.

Some analysts point out that most stocks are overvalued and the market is a sell-off. What’s your opinion?

Selected stocks are overvalued to some extent. Any undervalued market has some overvalued stocks. On the other hand, If you look at last year’s company earnings and try to evaluate, most stocks look expensive because earnings of companies were awful. But it’s a different scenario altogether if you look at forecasted numbers for 2010 and 2011. I think we are starting to see what is in store in terms of corporate earnings going forward. When we take a look at 2009 December quarter earnings, profits are increasing sharply and we can expect this to continue.
Furthermore I don’t think it’s fair to rate the market, based on historical average PERs, as things have changed drastically. Discounts that prevailed due to war and political instability is no more. So, investors need to carefully relook at those factors.

What is you expectation in terms of corporate earnings for 2010?

I think market earnings could increase at least by 30-40% from 2009. Almost all sectors are likely to post superior performance this year. Segments such as leisure, plantations in particular would see major improvements in its profitability.

Will existing economic developments support a positive trend?

The economic indicators improved significantly after the war ended. At the moment, the biggest worrying factor is inflation and I think inflationary pressures would continue to exist due to relaxation of monetary policy and other statistical reasons. However I do not expect the authorities to aggressively raise interest rates in order to tackle this, as the main objective of the government is growth. In my opinion, as long as interest rates hover around current levels, equities would remain attractive. I think the focus of the current administration should be on the fiscal side. High government spending (recurring expenditure) resulted in unmanageable fiscal deficits in the past, and that was the main cause for high inflation in Sri Lanka over the last two decades.

What is the market reaction to the recently concluded election?

Investors were more worried about the stability factor than the party or individual. They anticipated a strong mandate, so that whoever gets elected can work towards post-war economic revival which will immensely help the market. So I believe investors welcome the result and market was unaffected by the outcome of the polls.

There were substantial foreign outflow from CSE this year. What is the reason?

I think profit taking and concerns over political stability could be some of the reasons for foreign selling. But I’m confident that once the elections are over and when there is clear macro direction, foreigners will revisit CSE.

Any year end target for CSE?

As I said earlier, a 30-40% earnings growth is likely this year and I expect indices to tract the growth in earnings.
Identify 3 sectors that would be bullish in 2010
Banking, Leisure and Plantations

What’s your advice to the investor community?

As I mentioned earlier, there is still room for growth. Nevertheless, investors should watch for possible setbacks, as the market is heading towards unknown territory. Therefore it is crucial that you stick to stocks with strong fundamentals and growth prospects.