Indices head south as selling pressure creeps in

The lack of any positive developments in the macro front led the stocks in the Colombo bourse to close in red for the week amidst heavy trading witnessed on few selected counters.

Indices, which picked up during the last two weeks were seen loosing ground throughout the week.

The ASPI (All Share Price Index) lost 65.9 points or 2.67% to close at 2404.5 points while the liquid MPI (Milanka Price Index) declined by 109.3 points or 3.64% to stand at 2891.5 points on Friday.

The highlight during the week was the Rs.544 million transaction on DIMO, where the Company bought back 3.4 million of its own shares from Hayleys witnessing the first ever share repurchase on the Colombo Bourse.

The counter saw 3.54 million shares trading during the week, topping the week as the largest contributor towards the market activity amounting to Rs.560.8 million. Despite being the highest contributor, DIMO share ended down Rs.22 or 18.3% at Rs.98 on Friday after trading between a wide price range of Rs.98 and Rs.135 per share.

JKH placed second in terms of activity levels for the week helped by few crossings on the counter. The high cap conglomerate added over Rs.353 million to the week’s turnover, with a trading a volume of 3.2 million shares. JKH saw its share value dip 2.24% Week on Week (WoW) to close at Rs.109 per share on Friday.

Ranked as the third largest contributor was the banking sector counter NTB accounting for a turnover value of Rs.169.8 million, with the majority of the NTB’s turnover coming on Tuesday. NTB share during the week peaked at

Rs.35 before closing 1.5% higher WoW at Rs.34.00 per share. The total weekly volume of NTB amounted to 4.85 million, which included several crossings on Tuesday.

Another high cap counter to capture investor attention during the week was Distilleries, which generated a contribution of Rs.118.2 million for the week. Distilleries saw 1.24 million of its shares changing hands during the week while the share price fluctuated within the prices of Rs.94.75 and Rs.99.00, showing 4% decline over the week to close Rs.4.00 down at Rs.95 per share.

Though market lost ground during the week, the activity levels improved marginally by 5.7% compared to last week to stand at Rs.2.05 billion supported by few crossings on counters such as JKH, NTB & Nestle and by the Rs.544 million DIMO share buy back on Monday.

The average daily turnover stood at Rs.410 million for the week. Meanwhile foreign investors were net buyers for the week amounting to Rs.169.4 million with foreign buying standing at Rs.462.6 million and foreign selling accounting for Rs.293.2 million. Foreign participation during the week stood at 18.4% of total activity, higher than the last week’s 7.2%.

Vallibel, Vanik Incorporation, NTB and Pan Asia were among the most actively traded stocks during the week.

Short to medium term trend to be negative

Indices headed south after two weeks of gains as selling pressure was witnessed on some of the market heavyweights. During the week All Share Price Index (ASPI) lost 65.9 points while the more liquid Milanka Price Index (MPI) dropped 109.3 points compared to last week’s closing levels.

We expect the market sentiment to remain weak with investors continuing to adopt a cautious approach. In our opinion market is unlikely to gain positive momentum in the short to medium term considering the rising inflation and high interest rates. However we believe volatility in indices would continue like we saw during the last 2 months providing some trading opportunities to the investors.

Economic Update

Inflation leaps on price revisions

Inflation as measured by the New Colombo Consumer Price Index (CCPI-N) accelerated further to a record 28.2% Year on Year (YoY) in June 2008 with the Month on Month (MoM) increase in price levels standing high at 3.7%.

The sharp rise in inflation in June was largely backed by substantial revisions made to fuel prices and bus fares during the latter part of May, causing a sharp 28.4% increase in the transport sub segment of the index.Furthermore, the food items, which account for bulk of the CCPI basket too witnessed a notable 1.3% increase during the month.

We expect inflation to remain high over the coming month as the high energy and transport costs would continue to weigh on prices of most other categories, particularly food. However, we expect the MoM increase in prices to slowdown in July to 1.1%. According to our forecasts the annual averageinflation will stand higher at 22.0% in July 2008 while the point-to-point inflation is projected at 27.6%.

Economy expands 6.2% in the first quarter

Despite spiraling inflation and high interest rate environment, Sri Lanka’s GDP grew by a noteworthy 6.2% during the first quarter of 2008.

Although 1Q2008 economic growth stood higher than the 6.1% growth recorded during the corresponding period last year, the economy witnessed a slowdown from the 7.6% growth achieved in the last quarter of 2007.

The services sector contributed most to the overall growth with a 6.4% expansion supported by solid growth in transport and telecommunication sub sectors. Meanwhile, the industry and the agriculture sectors expanded 6.0% and 5.9% respectively.

Going forward, we expect the GDP growth in 2008 to be lower than the 6.8% achieved in 2007, as the prevailing high inflation and interest rates affecting the consumer spending and investments.

Thus according to our forecasts the GDP growth in 2008 stands at 6.3% with contributions from agriculture and services sectors are likely to remain healthy.

This information has been compiled from sources that we believe to be reliable but we do not hold 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.

All opinions views findings and conclusions included in this report constitute our judgment of this date and are subject to change without notice. HNB Stockbrokers (Private) Limited has the sole copyright for this report and the information and views contained cannot be reproduced or quoted in part or whole in any form whatsoever without the written permission from HNB Stockbrokers (Private) Limited.