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Wednesday, 27 July 2011

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Investors realizing inherent risks:

Market euphoria receding - Frontier Capital CEO

After the phenomenal rise of the All Share Index (ASI) by 284 percent to a high of 7,797.96 on February 28 the stock investment euphoria is now gradually coming to an end with the index falling below its lowest ever during the last two years.

Investors are beginning to realize the inherent risk involved in investing in illiquid markets, a top market analyst said.

Nishan Sumanadeera

“The market had already enjoyed peace dividends and time has come for investors to adopt a more prudent approach towards the stock selection instead of chasing behind rallies and leveraging their portfolios in anticipation of higher returns, Frontier Capital Partners Ltd CEO Nishan Sumanadeera told Daily News Business yesterday.

Investors need to identify value stocks, based on fundamental analysis and Value For Money (VFM) approach involving analysis of strength and weaknesses, future growth potentials, opportunities and threats applicable to respective businesses.

Although the current market sentiments are depressed, Sri Lanka has enormous potential in terms of future growth.

Sri Lanka’s sovereign rating outlook was recently raised to positive from stable by Moody’s Investors Service and Sri Lanka received a record $236 million of Foreign Direct Investment (FDI) in the first quarter of 2011, with the tourism industry attracting most of the inflows.

Sri Lanka successfully raised $1 billion from the sale of dollar-denominated bonds in its fourth international offering at a time of world debt crisis reflecting investor confidence.

High fiscal deficit and over-dependency of external borrowings still remain a concern with Sri Lanka’s high debt to GDP ratio of over 30 percent and FDI to GDP ratio of less than 2 percent.

“Sri Lanka’s capital market represent only fraction of its national assets. The total market capitalization of the Colombo Stock Exchange (CSE) is about US $ 23 billion representing less than 50 percent of country’s GDP which is about US $ 48 billion. The private sector is likely to contribute with more than 20 percent growth in earnings and Gross Domestic Product (GDP) growth expected to be in the range of 8 percent, reflecting the future potential he said adding that Sri Lanka’s land bank of 65,000 square kilometers which can easily be valued over US$500 billion requires more than average return on assets (ROA) to spark the economy into the next level”.

Sri Lanka also has “high growth, attractive labour costs and a unique strategic geographical location that could be the opportunity for the future, especially in port activities.”

Sumanadeera pointed out that the Stock Market is in the stage of consolidation and Colombo’s investor sentiments will be no longer be influenced by IPO’s, illiquid trading or irrational market behaviours which had been a hallmark during last two years.

In future, investors are likely to be more prudent and likely to make their investment decisions based on corporate earnings and asset values. We are likely to a witness an uptrend of growth in stocks and blue chip shares during the next stage. He stressed that valuations of the stocks were likely to get attractive in the backdrop of higher quarterly earnings and market correction which had resulted in nearly 20 percent decline from its peak.

Foreign investors are also likely to re enter the market soon subject to early resolution to much worried debt crisis in US.

He said the current sentiments in the Colombo Stock Market was clearly reflected by the recently concluded IPOs such as Expolanka, Softlogic and Textured Jersey which resulted in subscriptions less than expected and initial trading prices below its initial public offer prices.

 

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