Investors retaliate early losses

MARKET volatility continued through out this week, with indices falling sharply during the first two days of the week and regaining moderately thereafter.

However the gains recorded during the latter part failed to offset the early losses that amounted to around 200 points in 2 days, amid increased violence in the North East.

The ASPI (All Share Price Index) closed the week at 2159.3 points down by 4.35% or 98.1 points from last week, while the MPI (Milanka Price Index) closed the week at 2770.8 points showing a sizable 110.4 points or 3.83% decrease compared to last week's closing levels.

The major trade this week was on Associated Hotels, which saw a 47% stake or 4.28 million shares changing hands. Hemas sold the stake at Rs. 36.50 per share, to Galle Face Hotels. The trade contributed Rs. 156.4 million toward weekly turnover, highest contributor this week.

Dialog saw its share price dip by 3.9% WoW to close the week at Rs. 18.25 per share. Approximately 7.2 million shares traded for the week in the range of Rs18.75 and Rs17.25 per share. The counter contributed Rs. 128.7 million towards weekly turnover.

Fixed line telecom giant SLT saw 4 million of its shares trading for the week. The counter saw its share price fall notably by 6.25% WoW to close the week at Rs. 18.75 per share.

SLT managed to contribute Rs. 76.4 towards weekly turnover, fluctuating the in the range of Rs19.75 and Rs17.75 per share.JKH managed to contribute a sizable 128.4 million towards total turnover, with 0.86 million shares trading for the week.

The major portion of 0.38 million went through on Thursday. The counter closed the week at Rs. 150.25 per share down by 3% compared to last week's closing level.

Touchwood counters saw renewed interest this week with a modest 0.59 million shares trading for the week.

The counter saw its share price varying on wide range, at a low of Rs. 65.50 per share and a high of Rs. 108.75 per share to close the week at Rs. 105.25 per share. Touchwood managed to contribute a notable 53.2 million towards weekly turnover this week.

Ceylinco Housing rose by a sizable 14.5% WoW, amid a 4 for 5 bonus announced on Wednesday. The counter traded at a high of Rs. 110 per share and a low of Rs. 72 per share. Approximately 0.364 million of Ceylinco Housing shares traded for the week contributing Rs. 30.7 million towards weekly turnover.

Total turnover for the week stood at Rs. 1.3 billion, showing a 17.7% reduction WoW. The major contribution towards turnover of Rs. 488.1 million came on Tuesday, with the inclusion of contributions from the above stated sale of Associated Hotels counters. The average daily turnover for the week stood at Rs. 268.9 million.

Foreign activity levels remained low this week with both foreign purchases and foreign sales showing sizable declines.

Foreign purchases stood at Rs. 296.7 million showing a sizable 56.7% decrease compared to last week, while foreign sales, which stood at Rs. 145.8 million, showed a 64.7% decline for the week. Foreign participation remained low at 16.4% of total activity.

The highest traded stocks for the week were, Sierra, Dialog, Royal Ceramics, Associated Hotels and Vanik Incorporated Ltd.

Stick to fundamentals

As pointed out last week, the indices remained highly volatile throughout the week as investors were caught between a series of violence in the North East and a welfare budget that further increased the corporate tax rates.

After a bleak start to the week in the aftermath of two separate incidents that killed 14 soldiers, the markets got a boost amid strong international pressure to maintain the ceasefire agreement (CFA).

The killings that were designed to provoke the military to retaliate, failed, as the security forces remained calm and acted responsibly.

Norway recalled as peace brokers

President Mahinda Rajapaksa invited Norway to continue its role as facilitator to the peace process after an escalation of violence in the North East.

The President, who questioned the role of Norwegian peace brokers and vowed to renegotiate the ceasefire agreement during his election campaign, has shown his flexibility to resolve the ethnic issue.

We commend

President's new stance that offer reasonable grounds for the LTTE to return to the negotiation table and reiterate our view that both parties should be willing to come out of the extremist shell to resolve this complex process.

The market immediately reacted positively after government recalled the Norway, expecting more stability to the truce agreement.

The Rating outlook

Fitch Ratings assigned Sri Lanka a BB- rating, three levels lower than investment grade, a rating similar to countries such as Indonesia and Brazil.

According to Fitch, "A key support for the rating is, Sri Lanka's impeccable sovereign debt service record, an attribute which is rare among sub-investment grade countries."

Meanwhile Standard & Poor's Ratings Services assigned its 'B+' long-term foreign currency and 'BB-'local currency sovereign credit ratings on Sri Lanka. Standard & Poor's also assigned 'B' short-term foreign and local currency ratings to Sri Lanka.

The ratings reflect the economy's robust medium-term growth prospects, as well as the favorable terms of Sri Lanka's external debt, which impose minimal stress on external liquidity.

We view obtaining the country rating as a positive move as it enable Sri Lanka to raise funds in international markets at relatively attractive rates.

At a time when foreign funding remains an absolute necessity, the ratings, though not the most attractive would enhance the chances of better positioning in the international markets.

Apart from being a supportive measure for fund raising we believe that obtaining a rating is also a control measure, as the government would now try to avoid any downgrading of the current rating.

Thus monetary planning and other economic management measures would be directed towards further improving the rating, which in our opinion would add better controls to a mismanaged state sector.

Budget 2006:

No real incentives for capital markets

The budget 2006 had no direct impact on the capital markets with taxes on capital market transactions and its participants remaining almost unchanged.

However the indirect impact remained somewhat negative with the upward revision in the corporate taxes, hampering the earnings growth.

Rise in Corporate tax rates hinder profit growth The increase in the corporate tax rates for listed companies, to 35% from 30%, will affect the overall profitability of the market as more than 95% of the listed corporates will suffer a 4% - 5% dip in their bottom line.

Furthermore the Social Responsibility Levy was increased from 0.25% to 1%, adding more burdens on listed corporates.

The changes in the financial VAT rate from 15% to 20% will have a further impact on the banking and finance companies. The drop in market earnings growth rates would increase the forward market PE, thus disturbing the overall valuations of the market.

Opportunities for growth

On a positive note, many development projects have been identified in the budget proposals that would boost the infrastructure development.

Also many tax incentives have been offered if the businesses are willing to go the outskirts from Colombo and Gampaha. Given timely implementation and adequate opportunities for private sector participation, we believe that this would create likelihood to improve the profitability of the listed companies.

Furthermore relief was offered to sectors such as apparel, agriculture and hotels, while other sectors such as banking, imports, motor and food & beverages were affected negatively. Telecom and transportation (shipping) sectors also benefited from the possible growth and tax reversals.

Therefore we are of the opinion that selected sectors would benefit from the budget, but the overall pressure on their bottom line will be on the rise due higher tax liability.

Considering these factors, we believe that the overall impact from the budget proposals towards capital markets is moderately negative. (Refer our 25 page comprehensive report on "Budget 2006 impact on Sri Lankan economy" for further details) No end to the uncertainty but lets move on

As we expected the activity level picked up towards the latter part of the week after the budget proposals erased some of the pessimistic assumptions of market players.

We expect the activity levels to somewhat improve in the coming week but indices are likely to remain volatile amid the continuing uncertainty.

We strongly advice the investors to stick to the fundamentally sound counters and not to hesitate in booking profits at different intervals, while placing close attention to the developments in the peace front.

On the other hand, we alert the investors to carefully look for bargain hunting opportunities whenever the counters drop to attractive levels.

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

No matter published herein create any liability of any kind of HNB Stockbrokers (Private) Limited or its associates.