      Business Editor : Eriq Dewanarayana Market Resumes its Downward Journey After the Brief Pull Back Market fell by 6% & 9% (ASI & SI) during the week as short-term profit taking on blue chips by nervous investors changed the mood of optimism observed during the previous week. The failure of the market to surmount the resistance of 615 triggered the bout of selling that brought the market down sharply. Absence of any market moving news, and the possibility of the government postponing the Provincial Council (PC) elections scheduled for August 28th using emergency regulations, discouraged any aggressive buying in the market. Few large parcel purchases by foreigners on Friday boosted the turnover and enabled the indices to edge up marginally. Low Key Trading during the Election Period No major market movements can be expected in the run up to the PC and Presidential elections, expected in the latter part of this year and early next year. However there was some determined buying in the plantations sector and in the Banking & Finance sector during the recent pull back. Improving high grown tea prices, higher volume of premium low grown tea production, higher productivity and efficient private sector management kept the plantation share prices well supported. The prospect of a steady Rupee and firm interest rates in the election season provided adequate strength for the Banking sector companies. Market Outlook Final Sell-off before the Resumption of the next Bull-Run What we are encountering now may well be the final sell off before the beginning of the next bull-run. Market perhaps needs a good bout of selling to give it a spring-board push-up to embark on a sustained up-move. Barring external shocks from the international arena and the domestic political scene, the market could begin a determined climb towards higher levels, at the end of the present round of selling. Good Corporate Results and the Steady Rupee Could Easily Support Another Bull Run The first quarter results of companies in almost all the sectors, this year, were excellent. We can easily expect even better results for the second quarter since the budget concessions given to businesses this year will start getting reflected in accounts starting from the April-June quarter. Moreover we are sure to hear some good news from the war front in the North pretty soon. The SAARC summit scheduled for the end of this month shall give the market a further boost. Asian Currencies Show Signs of Recovery Japanese Yen which fell sharply on the resignation of Prime Minister Hashimoto subsequent to his party's election defeat, recovered on US Government's pledge of continued support to assist the ailing economy. Korean Won too appreciated to an extent that made their government to worry about its strength. Except for the Indonesian Rupiah the rest of the East Asian currencies have got somewhat stabilised in the recent past. The worst of the Asian crisis may be over, though it is imprudent to expect a return to perfect normalcy before the end of next year. For an investor with a long term perspective Asian securities, at current prices, offer excellent value for money. Market Statistics The advancers to declines ratio for the week was 0.62:1. It fluctuated during the week from a low of 0.24:1 to a high of 1.07:1. Foreign activity for the week was 64.04% of the turnover. Net foreign purchases amounted to Rs. 195.45m. Heavily Traded Stocks: Elasto-meric(5,200,000), Distilleries (6,054,800), Madulsima (841,200), Asia Capital (575,300), Pure Beverages (521,100) Vanik Debenture 15%(449,500), Asian Hotels (304,900), JKH (303,100), NDB (249,400), Seylan (237,500), Richard Pieris (206,800), Sampath (197,400). Political Outlook Uncertainty looms over Provincial Council Elections On closing of the acceptance of nominations for Provincial Council elections the Commissioner of Elections fixed August 28th as the polls date for the PCs of Western, Central, North Central, Sabaragamuwa & Uva Provinces. However with conflicting statements made by various Ministers regarding the desirability of a postponement of elections, it is doubtful whether the polls will take place as scheduled. Market no doubt is eagerly waiting for a signal from these elections to decide on the next move. Month end's SAARC Summit in Colombo may bring good news to the region South Asian Association for Regional Co-operation (SAARC) summit in Colombo, to be attended by the Heads of State of Bangladesh, Bhutan, India, Maldives, Nepal, Pakistan and Sri Lanka, scheduled for 29th, 30th & 31st July, ‘98, might bring some positive sentiment to the South Asian region, which took some severe beating in the aftermath of the testing of nuclear weapons by India and Pakistan. Indian plans to test a long range ballistic missile capable of delivering nuclear weapons over international boundaries shall however dim the mood at the talks. Economic Outlook Central Bank Report For the First Quarter of 1998 received with Some Degree of scepticism Many have expressed their doubts about the accuracy and reliability of the Report Published by the Central Bank on the performance of the domestic economy during the first quarter of 1998. However since these figures are based on facts gathered from reliable sources we feel that the report reflects a fair view of the economic performance during this period. Moreover our researchers are pretty certain that the domestic economy will grow at a rate of 6% or more this year as predicted by the economists at the Central Bank. The timing of the report, released just ahead of the crucial PC polls, probably triggered the hostile reception it received. Plenty of rain, no power shortages, higher productivity in the agricultural sector and a good market for agricultural produce and manufactured goods exports support the growth rate reported. Treasury Bill Auction — The Treasury Bill auction held on Wednesday 15th July 1998 was over-subscribed with bids amounting to Rs. 4,685m received. The government offered treasury bills worth Rs. 3,403m. The weighted average yield for three - month bills increased by 6 basis points to 11.91, for six-month bills the rate increased by 12 basis points to 12.13% & for twelve-month bills it increased by 12 basis points to 12.28%. Gainers: Stocks that moved up significantly during the week were:
Losers: Stocks that moved down significantly during the week were:
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Stock Recommendations
CDIC Sassoon Research Sarath Rajapakse Chaminda N. Silva Research Analyst) Stock market review Market drops on profit taking The ASI dropped 17 points (2.8%) due to profit taking after having gained 2.4% over last week, and closed once again below 600 levels at 595.6. Average daily turnover picked up by 34% to Rs. 110.5m. While foreign purchases picked up by over 400% to register Rs. 354m (net inflow of Rs. 196m), foreign activity remained subdued at 46.4% of total activity. Plantation results continue to be outstanding Balangoda Plantations Ltd. (BALA) and Madulsima Plantations Ltd. (MADU) have released their full year results for FY 12/97. BALA's earnings have increased 491.8% YoY to Rs. 293.2m while MADU has reported an earnings growth of 246.9%. YoY to Rs. 194.8. Both plantations are managed by Stassens Exports Ltd. Fourth largest tea exporter in this country. The results are in line with our expectations. We were expecting profits of Rs. 292.7m for BALA and Rs. 184.6 for MADU for the financial year FY 12/97. The key reasons behind this spectacular earnings growth have been due to high tea prices and better manufacturing methods and agricultural practices adopted by the Stassen Group. However, we have taken a conservative view on our earnings forcast for both plantations in FY 12/98 mainly due to expected contractions in tea prices in the 2HCY 98. Central Bank to increase CAR to 10% The Central Bank has announced its intentions to increase the Capital Adequacy Requirement for commercial banks to 10% and 5% in core capital and primary capital. Currently the ratio is 8% on core capital and 4% on primary capital, in keeping with the BIS requirements. The Bank Supervision Division of the Central Bank hopes to raise the ratios in the interest of prudence. We view this as a positive development for the banking sector. Of the listed commercial banks, Commercial Bank of Ceylon and Sampath Bank have CARS well over 10%. Hatton National Bank and Seylan Bank which have ratios close to 8% hope top boost capital through debenture issues. The Central Bank will give the commercial banks adequate time to adjust their capital bases before the change is made law. SEYS 68% YoY growth in 1H98 Seylan Bank released its results for 2HFY 12/98. Total income has dropped by 0.6% to Rs. 2305m. Trading profit and PAT have increased by 177% to Rs. 207.5m and by 68% to Rs. 93.4m respectively. Trading profit has increased significantly due to a reduction in operating expenses and improvement in net interest income due to lower deposit rates. Provisioning has increased considerably as the bank is making consistent provisioning in every quarter rather than in the fourth quarter only. Loans and advances increased 21% YoY to Rs. 21.6bn and deposits increased 11.2% YoY to Rs. 29.5bn. SEYB also released its audited full year results for 1997. Consolidated net profit has come in at Rs. 129m (-37.2% YoY). The results include a Rs. 32m add back which is the share of loss from Seylan Merchant Bank. Volatile but attractive Although buying support especially from foreigners was evident this week, the volatile situation in the region may prevent the market from making significant advances in the short term. However, given that good corporate results continue to come in, we maintain our positive view on the market and advise investors to buy fundamentally sound stocks: Grains, Balangoda, Maskeliya, Dockyard, Sampath Bank. JF-HNB Research. This information is as at 17th July 1998. July 17, 1998
As the uncertainty becomes certain, the regional markets begin to move upwards though as a region Asia is yet to appeal on the Investor's Choice List. The current outlook point towards a consolidation of regional equity markets in the coming months while long term investors may use the current levels for a gradual entry. This is increasingly visible at Colombo bourse. Throughout the week declines were noted while the Friday some saw form of resistance. The All Share Index lost 15 points for the week before settling down below a level below 600 while the sensitive closed at 897, almost 2% below the last week. The turnover levels were moderate with the exception of Friday, where a large quantity of Elastomeric Engineering stocks changed between a local investor and a foreigner. The volumes were moderate. The retailers kept the speculation move across the market with narrow price changes. Institutional investors were hardly active while notable price movements were witnessed in bluechips. Foreign interests were mixed while moderate non-national purchases were evident. The blue-chips continue to be a preferred choice for foreign sales. The Week ended up with a net foreign inflow of Rs. 195 million thanks to a last minute transaction of Elastomeric Engineering. The upcoming Provincial Council election is unlikely to make a significant impact on the investment climate though it is expected to be a time test for the government as well as for the opposition. The present macro conditions suggest as sluggish period in the market coming months while little room may exist for speculative trading. We continue to advise investors to be cautious in selecting stocks. (Time for Medium Term Purchases) An holding period of 6 to 12 months necessary for any significant returns from the market. Though the market may move-up gradually there are few stocks which could move faster and this list will include JKH, Aitken Spence, Dock Yard, Tokyo Cement, Maskeliya, Madulsima, DFCC, Commercial Bank and Kelani Valley. For a moderate income, Vanik's 15% debenture is attractive at Rs. 60 while Asia Capital and Vanik offers attractions for speculators. MMBL Group Research Allied Phillip Securities Ltd. |
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