islbsnss.htm

Week Ending 23rd October 1998
Market continues to decline
The Colombo market continued its decline despite some gains in the beginning of the week. The All Share Price Index dropped a marginal 0.2% WoW while average daily turnover was at Rs. 37.7m for the week, down from Rs. 49m last week. Foreign activity also has declined to 20.1% of turnover as compared to 38.6% last week. Significant trading was witnessed in NDB, Lanka Lubricants, Lanka Ceramics and Asian Hotels during the week.

August exports falls 13.2%
A 13.2% YoY fall in exports has been recorded in August 1998. All sub-categories of exports have fallen in the month. With a continued, decline in tea prices a 5% decline in tea earnings has been recorded for the month. In the first half of the year strong tea prices helped boost the overall export numbers and as a result the cumulative tea exports for the first eight months are still recording a 21.2% growth. After a 22.5% growth in garment exports in July 1998 there has been a 5.7% decline recorded in August. Imports have risen 10.7% YoY but this is against a low base in August 1997 (fall of 11.7%) and a sluggish growth in July (0.1%). Consumer goods imports have risen by 7.4% which has been led by a 25.4% growth in consumer durables in which motor vehicle imports have recorded a 65.5% growth. In comparison imports of intermediate goods has only risen by 5.5% with a 46.5% fall in petroleum imports. Investment goods have risen by 21.2% but this is after a 10.8% drop in August last year. The trade deficit has risen by 1002% to US$ 110m but this huge rise reflects there relatively small US$10.1 m deficit last year. Our forecasts for export growth for 1998 which is currently at 8% YoY is unlikely to be met given the continued weakness in tea prices. There is likely to be increased pressure on the rupee as a consequence of this deterioration.

Central Bank cuts repo rate
The Central Bank has reduced its overnight repo rate to 11.75 percent from 12.00 percent. This followed 12 month T bill rate rising above the key 13 percent level for the first time this year to 13.02 percent. In September the repo rate was reduced to 12 percent from 12.1 percent the previous month. The reduction in the repo rate appears to have been made to ease the traditional upward pressure in interest rates towards the end of the year when the government has to meet its spending commitments. Earlier in the year repo rates had been increased to curb speculation on the rupee and rising inflation. The recent strength of the rupee and signs of moderating inflationary pressures appear to have also assisted in the cut in the repo rate. We maintain our forecast of 13% for year end 12 month T bill rates and an annual average of 12.11%.

Market has limited downfall
Although buying support, especially from foreign institutional investors (FIIs) was evident last week, we do not expect a drastic positive change in market direction in the short term, since emerging market whose still persist. However, we believe that the market has clearly bottomed out in valuations and there is a big opportunity for selective stock picking. Our favourites, remain; JKH, SPEN’s, Sampath Bank, Commercial Bank, Lanka Lubricants, Colombo Dockyard, Ceylon Cold Stores.

The National Development Bank (NDB) officially opened its eighth Branch on the 21st of October. The branch was opened by the Chairman, Dr. Nimal Sanderatne and General Manager, Mr. Ranjit Fernando of the NDB.

Mr. Fernando said that one of the reasons the NDB selected Puttalam as a location for a branch was that, in recent times, its small and medium scale industrialists have been keen recipients of credit under the SMI schemes administered by the Bank.

A coastal district with thriving industries entered around fisheries and prawn farming activities as well as salt production and coconut cultivation, it is seen to have vast potential for further development. Other major industries in the area include cement and brick production and animal husbandry.

Puttalam branch manager, Mr. Chandrasekera noted that as a resident of Puttalam, he is delighted that he now has the opportunity to bring the services of NDB to the people of Puttalam. He and his staff look forward to bringing its expertise in specialist project lending and other financial services to the entrepreneurial community of Puttalam and surrounding areas.

Among its range of services, the branch will offer medium to long term finance, at very competitive rates, including finance for SMI through the ongoing SMAP and SMILE credit lines, and provide leasing for a variety of needs. It will also place at the disposal of its clients, the expertise developed by the NDB over the years, in industrial, agricultural and service sectors. The Branch will also operate a special scheme known as the Perennial Crop Development Project (PCDP) implemented by the Central Bank.

	Mon	Tue	Wed	Thu	Fri
	Oct. 19	Oct. 20	Oct. 21	Oct. 22	Oct. 23
All Share	493.03	498.42	494.82	491.96	489.51
Index (ASI)Sensitive	701.26	718.41	711.30	706.90	702.41
Index (SPI) Turnover	21.00	50.89	17.31	11.16	91.38
Foreign	55.7%	34.3%	15.4%	15.5%	73.7%
Percentage Foreign	9.70	18.30	1.02	0.81	50.89
Purchases Foreign	13.70	16.58	4.32	2.66	83.80

As the Dow Jones continued its mini-rally, most fund managers opted to ignore the world of opportunities in Asia. Though the belief is that individual companies may grow faster than the economies, the burning questions is ‘How fast will Asia grow?’ Still most fund managers are advised to stay out of Asia as there are too many risks for a medium term investor.

As Colombo continued its direction less drift, foreign investor strategy focused on disposal and selective buying in a dull week of trading, the All Share Index did not show any change but the Sensitive Index gained 5 points to close at 702. Turnover levels were moderate except for Friday when foreign investors dominated the day.

Foreign activity did not show any significant change, except for a large transfer on Friday. Their focus was on stock such as Asian Hotels, JKH, NDB, Lanka Ceramics, Sampath and Dockyard. The net outflow for the week amounted to Rs. 41 million with purchases amounting to Rs. 80 million. Domestic institutions did not focus on the market either with a very low contribution to the market.

Though peace is far away, initial signs of encouragement are present with the recent dialogue between the business community and the political parties. This was enhanced by the speculation of a third party involvement the mediation.

Whatever the future strategy is, the present represents a critical stage. Export competitiveness, declining tourist arrivals, rigidity of the Rupee and the escalating defence budget will be addressed in the upcoming budget.

The expectation of the market is somewhat uncertain. As more than Rs. 1.4 billion worth of stocks have been liquidated by non-nationals in the Colombo course this year, the upward movement is limited. A long-term investment horizon is recommended at this juncture. The picks may include JKH, Sampath, Dockyard, Commercial Bank, Tokyo Cement and DFCC.