HNB Stockbrokers' weekly market review

Buoyant investors take indices to new highs

THE market remained positive for most of the week, as the investors continued to bet on a positive result from the upcoming Presidential polls. However the ASPI (All Share Price Index) fell moderately on Tuesday amid profit taking but soon recovered on Wednesday to bulldoze into another new high.

The ASPI closed the week up by 88.6 points or 3.8% to stand at 2434.4 points, while the MPI (Milanka Price Index) managed to retain a growth momentum throughout the week, closing the week at 3208.9 points.

The index showed a substantial 123.2 point or 4% growth compared to last week's closing levels.

Dialog remained the highest traded stock for the week with 20.3 million shares being traded for the period.

The counter managed to peak at Rs.20.00 but closed the week at Rs.19.75 per share, showing a Week on Week (WoW) appreciation of 3.9%. Dialog was also the single largest contributor towards weekly turnover, contributing Rs.394.7 million.

Among other stocks, which saw its share price appreciate this week, was Blue chip conglomerate JKH. JKH saw its share peak at Rs.174 per share however closing the week at Rs.172 per share showing a 6.2% improvement WoW.

The counter saw 1.8 million of its shares trade for the week, becoming the second highest contributor towards turnover contributing Rs.303.2 million.

Banking sector counters HNB, Seylan Bank and Nations Trust Bank made reasonable contributions towards turnover this week. HNB saw its share price appreciate by 8% WoW to close the week at Rs.115 per share, contributing Rs.130.4 million towards weekly turnover.

Seylan rose by 5.8% WoW, closing the week at Rs.55 per share, contributing Rs.102.8 million towards weekly turnover. Nations Trust Bank saw its share price rise by 8.8% WoW to close the week at Rs.31 per share, contributing Rs.101.3 million towards weekly turnover.

The total turnover for the week remained static at Rs.3.28 billion for the week showing a mere 0.2% increase from last week. Meanwhile the average daily turnover stood at Rs.657.8 million.

Foreign investors remained net buyers for the week amounting to RS.429.3 million. Foreign purchases was up by 80% to stand at Rs.892.4 million, while foreign sales saw a 34.1% increase to stand at Rs.463.1 million for the week. Foreign participation for the week improved to 20.6% of total activity, compared to last week's participation level of 12.8%.

Dialog, SLT, Vanik Incorporated, Nations Trust and Royal Ceramics were among the most traded stock for the week.

Investors continue to be bullish

Market gained 3.4% last week, as the strong positive momentum continued for a yet another week pushing both indices to new highs. The ASPI has appreciated 219 points or 10.3% during September.

The market activity has risen to an astonishing Rs.13.3 billion, at a daily average of Rs.606.6 million and has pushed the year to date turnover to a record Rs.83.6 billion during September.

While the foreign participation has improved over the last 3 months, specially after the entrance of Dialog Telekom, the domestic retail investors have dominated the trading at the Colombo bourse.

2Q GDP grows faster than expected

The Central Bank announced the second quarter GDP results that showed a 6.0% growth compared to the corresponding period of the previous year.

The effects of the tsunami continued to be felt in the sub-sectors, fishing, hotels and restaurants and small industry, though some recovery was seen compared to the 1Q 2005. The 1Q results outperformed our expectations, specially in the industrial and services sectors.

Inflation shows a marginal slowdown

As expected by us, inflation slowed down during September, as the average annual Colombo Consumer Price Index (CCPI) dropped 12.7% as opposed to 12.8% recoded in August.

Accordingly, the CCPI stood at 4072.4 points up 1% from August 2005 and 10% since September 2004. The fall in the average CCPI was largely due to the relatively higher base, as the CCPI started to pick up at a faster rate commencing September 2004.

The increase in the CCPI for September 2005 was mainly due to increase in the food index which represents 62% of the basket. The food index rose by 1%, while the fuel index remained unchanged at 8611.2 points compared to the last month.

We expect the food index to further rise over the next three months, while the fuel index is likely to stay at current levels till end November.

Our full year forecast for average annual CCPI is at 11.7%, the slowdown largely due to the higher base value since January 2005 and the hold up of the domestic fuel prices.

Overall trend positive

The stronger than expected economic results gave a boost to Friday's trading with investors remaining optimistic on further improvements in the medium term. Looking at the real negative returns (inflation Vs bank interest), we expect the overall market activity to remain strong in the coming week with increased retail participation continuing further.

Investors are likely to ride on expectation of a positive result from the upcoming Presidential Election, thus the overall sentiment would continue to remain positive.

However looking at the continuous upward surge in the indices, we expect some profit taking in the coming week that may be countered by bargain hunting, leaving the market volatile.

Banks Bounce Back

Despite the difficult times experienced by the sector during 2004, the local banks are likely to rebound during FY2005 and kick into gear in the medium to long term.

The strong earnings forecast over the next 3 years suggest that some banks are making a strong comeback and are gearing themselves to meet the ever changing consumer needs and the resultant competitive environment.

We also see the sector preparing for consolidation and strategically remodeling to become prominent players in a post consolidation era and in our opinion banks are well positioned to take advantage from a robust economy.

We will be releasing a comprehensive report on banking sector on Monday October which features the six largest listed commercial banks in the country and a detailed analysis on the banking sector. Following are some of the key areas featured in the report.

Macro stability holds the key

The wide interest rate enjoyed by the banks over the last two years may take a breather in the next 2-3 years as the competitive environment demands the banks to operate with lower spreads and improve efficiencies by means of using technology and cleaner loan portfolio.

We believe that the banking sector would enjoy better lending opportunities to the industrial sector in the back of post tsunami reconstruction, thus the construction and housing sectors is likely to increase its representation in the banks' loan portfolio.

Managing Critical success factors to play a vital role

In our opinion the success of the banking counters would largely depends on its ability to address key issues such as escalating operating expenses, NPLs, narrowing spreads and high tax burden.

We expect the competition to intensify in the coming 2-3 years, thus we believe that proactive strategies are necessary to sustain the competitive advantage.

However in our opinion the strong fundamentals in most listed banking counters would provide stable returns to investors in the medium to long term.

"This information has been compiled from sources that we believe to be reliable but we do nothold ourselves responsible for its completeness or accuracy.