Current Market Conditions 02 November 2016 Candor Research Expert Analysis & Insight
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Candor Research Expert Analysis & Insight
Content Are you ready to gain control of your financial future Different market cycles & Macro economic implications Candor Research Macroeconomic outlook Prevailing risk factors Market & Prospective Sectors
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2
Candor Research Expert Analysis & Insight
How to gain control of your financial future
ඔබෙ� අනාගත ��යය ���ව සා�ෂා� කර ග�ෙ� ෙකෙ�ද? Ravi Abeysuriya, CFA Group Director, Candor President, Colombo Stock Brokers Association (CSBA) President, Association of Alternate Financial Institutions (AAFI)
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Candor Research Expert Analysis & Insight
Domestic Investor Participation Rate in the Sri Lankan Stock Market is one of the lowest
Source: Investor Protection, Equity Returns, and Financial Globalization, JOURNAL OF FINANCIAL AND QUANTITATIVE ANALYSIS © Candor Equities Limited Licensed and Regulated by the Securities & Exchange Commission of Sri Lanka
4
Candor Research Expert Analysis & Insight
CSE ready for a transformation Change 1. A New SEC Act - will give SEC more powers for civil and administrative sanctions with rules & regulations in line with international standards recommended by IOSCO
2. Demutualization of CSE (Listing of CSE) - a more flexible governance
structure fostering decisive action, greater transparency, and broader investor participation in the exchange
3. Product Diversity - Short Selling, Multi-Currency Equities, ETF, REITS
Derivative securities, Commodities trading etc. will increase portfolio of choices and provide ability to hedge against risks for investors
4. Risk Management - clearing house, DVP settlement, integrated Broker
Back Office and Order Management Systems, will address the settlement and counter party risks a major concern for foreign institutional investors
5. MSCI Emerging Market Index - Foreign investors managing USD 8 trillion replicate index
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Candor Research Expert Analysis & Insight
Your choice of Retirement
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6
Candor Research Expert Analysis & Insight
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Candor Research Expert Analysis & Insight
Rat Race Get up
Flawed education Prepare students to work
Pay bills & taxes © Candor Equities Limited Licensed and Regulated by the Securities & Exchange Commission of Sri Lanka
Desire
The fear of not paying bills The fear of being fired The fear of not having enough money The fear of starting over The fear of losing money
Go to work 8
Candor Research Expert Analysis & Insight
Why the Rich get Richer
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Candor Research Expert Analysis & Insight
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Candor Research Expert Analysis & Insight
Risk and Rewards of Different Asset Classes
High Risk / High Reward Potential
Low Risk / Low Reward Potential
Rated & Guarantee d CP’s Cash Equivalents (Repo’s)
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Treasury Bonds
Bank Deposits
Corporate Debt
Life Insurance
Equity Shares
Finance Co. Deposits
11
Candor Research Expert Analysis & Insight
Key Lessons
1. Poor people - job is their income 2. Rich people - assets are their income 3. If you want something, first generate enough cash flow from your assets to cover these expenses. Buy luxuries last, not first – a key difference between the Rich & the poor 4. Excess cash flow generated by your assets should be reinvested into other assets 5. Do not simply aim for more income, aim for more assets Š Candor Equities Limited Licensed and Regulated by the Securities & Exchange Commission of Sri Lanka
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Candor Research Expert Analysis & Insight
Key Lessons Cont. 6. Keep expenses low and reduce liabilities & taxes 7. Start your own Company – to protect your assets and reduce tax Companies pays taxes only on what is left. Learn investing it gives the best returns 8. Work to learn, don't work to earn. Find a job where you can learn your passion 9. Do not simply buy investments. First invest in learning about investing - Financial Literacy 10. You will become what you study, Find people who are the best in their field, learn and emulate them. Š Candor Equities Limited Licensed and Regulated by the Securities & Exchange Commission of Sri Lanka
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Candor Research Expert Analysis & Insight
Key Lessons Cont. 11. If you try not to lose money you will never make money. "Winning means being unafraid to lose." 12. Failure inspires winners and defeats losers. Let failures inspire you to try a different approach 13. Do not let fear or opinions dictate your actions. 14. Most sellers ask too much. It is rare that the asking price is lower than something is worth 15. Surround yourself with people who are smarter than you, and pay them well! Š Candor Equities Limited Licensed and Regulated by the Securities & Exchange Commission of Sri Lanka
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Candor Research Expert Analysis & Insight
Key Lessons Cont. 16. Do not say "I can't afford it" Ask "How can I afford it?" 17. Pay yourself first and invest into income generating assets before you spend 18. Have a clear financial objective to motivate you 19. Do not simply buy investments first invest in learning about investing 20. When investing, do not follow the crowd, and do not try to time the market. Profits are made when you buy, not when you sell Š Candor Equities Limited Licensed and Regulated by the Securities & Exchange Commission of Sri Lanka
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Candor Research Expert Analysis & Insight
Investing
1. Savvy investors knows that the seemingly worst of times is actually are the best of times to make money 2. Smart investors don’t time the markets. If they miss a wave, they search for the next one and get themselves in position for the next wave 3. Find a broker who has your best interests at heart who spend the time educating you 4. Get references from existing clients, look for experience, credentials of your investment advisor 5. Find out whether your investment recommendations are backed by Research Reports Š Candor Equities Limited Licensed and Regulated by the Securities & Exchange Commission of Sri Lanka
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Candor Research Expert Analysis & Insight
Do not miss out on the Power of Investing Real Stock Market Returns vs. Real Savings Account Return
45,000
42,679 40,000 36,614 34,049
Real Stock Mkt. Return Real Savings A/c Return
29,730
35,421 35,000 30,985
30,000 25,000
22,023 20,000
18,569 15,445
15,000 10,625
10,000
10,000
8,119 5,000 2,379
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2015
2014
2013
2012
2011
2010
2009
2008
2007
2007
2006
2005
2004
2003
2002
2001
2000
1999
1998
1997
1996
1996
1995
1994
1993
1992
1991
1990
1989
1988
1987
1986
1985
-
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Candor Research Expert Analysis & Insight
http://sirasatv.lk/isura-30-10-16/ or https://www.youtube.com/watch?v=E8cYtkRDYSk 18
Candor Research Expert Analysis & Insight
Keys to becoming a Product Investor 1. Understand Your Investments 2. Know Your Risk Tolerance 3. Monitor Your Investment Results 4. Diversify 5. Take Emotion out of the Equation 6. Develop a Plan and be Patient 7. Practice Risk Management 8. Seek Professional Advice Š Candor Equities Limited Licensed and Regulated by the Securities & Exchange Commission of Sri Lanka
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Candor Research Expert Analysis & Insight
Unit Trusts
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Candor Research Expert Analysis & Insight
What is a Unit Trust • Unit Trust is a pool of funds or portfolio of investments managed by a professional fund manager while an independent trustee maintains custody of all the assets • No single unit trust will cater to the requirements of all investors, it’s suitability will depend on investor’s requirements • The main types of unit trusts in Sri Lanka are Income Funds, Money Market Funds, Fixed Income Funds and Equity Funds • There are currently 14 unit trust management companies operating a total of 64 funds with assets under management of Rs.126 billion as at July 30, 2016 © Candor Equities Limited Licensed and Regulated by the Securities & Exchange Commission of Sri Lanka
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Candor Research Expert Analysis & Insight
Operating structure of a unit trust fund
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Candor Research Expert Analysis & Insight
What are the Advantages • Can start investing with even Rs.1,000 • Diversification to a portfolio of investments thereby reducing risk while enhancing returns • Units can be easily sold and converted to cash within a day • Unit Trusts are well regulated and are managed by professional fund managers • Active involvement of regulatory bodies and a high level of transparency • Trustee maintains custody of the fund’s assets, monitors transactions carried out by the fund on a daily basis & representing the interests of the investors • Maintain high professional and ethical standards © Candor Equities Limited Licensed and Regulated by the Securities & Exchange Commission of Sri Lanka
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Candor Research Expert Analysis & Insight
Stock Market
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Candor Research Expert Analysis & Insight
Behavioral aspects of the Equity Market
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Market Outlook 02 November 2016 Candor Research Expert Analysis & Insight
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Candor Research Expert Analysis & Insight
Content Different market cycles & Macro economic implications Candor Research Macroeconomic outlook Prevailing risk factors Market & Prospective Sectors
© Candor Equities Limited Licensed and Regulated by the Securities & Exchange Commission of Sri Lanka
27
Candor Research
The Cycle
Expert Analysis & Insight
8,000
4,000.00
7,000
+22%
+4%
-7%
3,000.00 -6%
6,000
2,000.00
-9%
-6%
5,000
1,000.00
4,000
-
3,000
(1,000.00) 1Y Tbill- 9.3%
2,000
1Y Tbill- 11.69% 2012
2011
1,000
1Y Tbill- 8.29%
NFI-(LKR19Bn)
1Y Tbill-6.01%
2013
NFI-LKR 39Bn
1Y Tbill-7.30%
2014
NFI-LKR 23Bn
1Y Tbill-10.24%
2015
2016
NFI-(LKR 5.3Bn)
NFI-LKR 22Bn
NFI-(LKR 2Bn)
-
(3,000.00)
3-Jul-16
3-May-16
3-Mar-16
3-Jan-16
3-Nov-15
3-Sep-15
3-Jul-15
3-May-15
3-Mar-15
3-Jan-15
3-Nov-14
3-Sep-14
3-Jul-14
3-May-14
3-Mar-14
3-Jan-14
3-Nov-13
3-Sep-13
3-Jul-13
3-May-13
3-Mar-13
3-Jan-13
3-Nov-12
3-Sep-12
3-Jul-12
3-May-12
3-Mar-12
3-Jan-12
3-Nov-11
3-Sep-11
3-Jul-11
3-May-11
3-Mar-11
(4,000.00) 3-Jan-11
ASPI
(2,000.00)
NFI
Net Foreign Inflow (LKR.Mn) ASPI Macroeconomic Indicators
CCPI-4.9% Budget-D-6.9% BOP –D-USD1061Mn Credit Growth-34% Currency-D- 3% Overheated economy
CCPI-9.2% Budget-D-6.5% BOP –S-USD151Mn Credit Growth-17.6% Currency- D- 12% Tightening measures
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CCPI-4.7% Budget-D-5.4% BOP –D-USD985Mn Credit Growth-7.5% Currency- D- 3%
CCPI-2.1% Budget-D-5.7% BOP –S-USD1369Mn Credit Growth-8.8% Currency-D- 1%
Stimulus to boost the economy
CCPI-2.8% Budget-D-7.4% BOP –D-USD1489Mn Credit Growth-25% Currency- D- 10% Overheated economy
CCPI-4.2% Budget-D-5.4% (IMF) BOP –S-USD356Mn Credit Growth-27.30% Currency-D- 2% Tightening measures
28
Candor Research Expert Analysis & Insight
Candor Research Macroeconomic Outlook
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Candor Research Expert Analysis & Insight
Exchange Rate Outlook 150.00
2%
10%
200
Net Interventions- USD 3Bn
100
145.00 0 -100
140.00
-200 135.00
-300 -400
Minimal Interventions by CBSL
130.00
-500
125.00
-600
CBSL Net Intervention (USD.Mn) © Candor Equities Limited Licensed and Regulated by the Securities & Exchange Commission of Sri Lanka
USDLKR
Source: CBSL, Bloomberg
30
Candor Research Expert Analysis & Insight
Positive outlook on the BOP Position 12,000
Stimulus for Imports+Global shocks
Stimulus for Imports
10,000 8,000
Stimulus for Imports
6,000 4,000 2,000 2007
2008
2009
2010
2011
2013
2012
2014
2015
(2,000) (4,000) Trade Deficit
Tourism
Worker Remitances
BOP
Source: CBSL Š Candor Equities Limited Licensed and Regulated by the Securities & Exchange Commission of Sri Lanka
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Candor Research Expert Analysis & Insight
Brexit: Weak growth prospect on Advanced economies 2.20% 2.00%
2%
1%
1.80% 1.60% 1.40% 1.20% 1.00% 2015
2016E Pre Brexit
2017E
Post Brexit
Source: IMF Š Candor Equities Limited Licensed and Regulated by the Securities & Exchange Commission of Sri Lanka
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Candor Research Expert Analysis & Insight
Brexit: Emerging market economies remain resilient 5.00% 4.50% 4.00% 3.50% 3.00% 2.50% 2.00% 1.50% 2015
2016E Pre Brexit
2017E
Post Brexit
Source: IMF Š Candor Equities Limited Licensed and Regulated by the Securities & Exchange Commission of Sri Lanka
33
Candor Research Expert Analysis & Insight
Brexit: Non-resident Capital Flows to emerging markets rebounded USD 236Bn
50.00
USD 41Bn
USD 0.7Bn
USD 85Bn
PreBrexit
40.00
Post Brexit
30.00 20.00 10.00 (10.00) (20.00)
Total Capital Flows
Total Debt Flows
Total Equity Flows Source: Bloomberg
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8/1/2016
7/1/2016
6/1/2016
5/1/2016
4/1/2016
3/1/2016
2/1/2016
1/1/2016
12/1/2015
11/1/2015
10/1/2015
9/1/2015
8/1/2015
7/1/2015
6/1/2015
5/1/2015
4/1/2015
3/1/2015
2/1/2015
1/1/2015
12/1/2014
11/1/2014
10/1/2014
9/1/2014
8/1/2014
7/1/2014
6/1/2014
5/1/2014
4/1/2014
3/1/2014
2/1/2014
1/1/2014
12/1/2013
11/1/2013
10/1/2013
9/1/2013
8/1/2013
(30.00)
Candor Research Expert Analysis & Insight
Brexit: Foreign flows to the Sri Lanka’s Gov. security market Rebounded PreBrexit
Post Brexit
600,000.00
-LKR153BN
LKR47BN
500,000.00 400,000.00 300,000.00 200,000.00 100,000.00 -
FH of Gov. Sec (LKR.Mn) Source: CBSL, Bloomberg © Candor Equities Limited Licensed and Regulated by the Securities & Exchange Commission of Sri Lanka
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Candor Research Expert Analysis & Insight
Brexit: Attractive yields in Gov. Securities 7.00 6.00 5.00 4.00 3.00 2.00 1.00 (1.00) (2.00)
SL-India Yield Spread (5Y) (%) Source: Bloomberg Š Candor Equities Limited Licensed and Regulated by the Securities & Exchange Commission of Sri Lanka
36
Candor Research Expert Analysis & Insight
Brexit: Foreign flows to CSE Rebounded PostBrexit
PreBrexit
3,000.00 2,500.00
LKR 4Bn
-LKR 6Bn
2,000.00 1,500.00 1,000.00 500.00 (500.00) (1,000.00) (1,500.00) 1/4/2016
2/4/2016
3/4/2016
4/4/2016
5/4/2016
6/4/2016
7/4/2016
8/4/2016
9/4/2016
NFI (LKR.Mn))
Source: Bloomberg © Candor Equities Limited Licensed and Regulated by the Securities & Exchange Commission of Sri Lanka
37
Candor Research Expert Analysis & Insight
Tightening monetary policy has been showing promising signs 400.00
300.00
200.00
100.00
0.00
-100.00
-200.00
Excess Liquidity (LKR.Bn)
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CBSL Tresuary Holdings (LKR.Bn)
Source: CBSL
38
Candor Research Expert Analysis & Insight
Consumer goods imports gradually declining 220.00 200.00 180.00 160.00 140.00 120.00 100.00
2014
2015 Consumer Goods
2016
Volume Index- 2010:100
Source: CBSL © Candor Equities Limited Licensed and Regulated by the Securities & Exchange Commission of Sri Lanka
39
MAY
APR
MAR
FEB
JAN
DEC
NOV
OCT
SEP
AUG
JULY
JUNE
MAY
APR
MAR
FEB
JAN
DEC
NOV
OCT
SEP
AUG
JULY
JUNE
MAY
APR
MAR
FEB
JAN
80.00
Candor Research Expert Analysis & Insight
Intermediate goods imports on a up trend
160.00 150.00 140.00 130.00 120.00
110.00 100.00 90.00
2014
2015 Intermediate Goods
2016
Volume Index- 2010:100 Source: CBSL
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MAY
APR
MAR
FEB
JAN
DEC
NOV
OCT
SEP
AUG
JULY
JUNE
MAY
APR
MAR
FEB
JAN
DEC
NOV
OCT
SEP
AUG
JULY
JUNE
MAY
APR
MAR
FEB
JAN
80.00
Candor Research Expert Analysis & Insight
Investment goods imports on a up trend 240.00 220.00 200.00 180.00 160.00 140.00 120.00 100.00
2014
2015 Investment Goods
MAY
APR
MAR
FEB
JAN
DEC
NOV
OCT
SEP
AUG
JULY
JUNE
MAY
APR
MAR
FEB
JAN
DEC
NOV
OCT
SEP
AUG
JULY
JUNE
MAY
APR
MAR
FEB
JAN
80.00
2016
Volume Index- 2010:100 Source: CBSL
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41
Candor Research Expert Analysis & Insight
Exchange Rate Outlook 155.00 150.00
10%
1% 3%
Downside Scenario
LKR 153 LKR 150
145.00 140.00 135.00 130.00 125.00 120.00
USDLKR
Base Case Source: Bloomberg
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42
Candor Research Expert Analysis & Insight
Interest Rate Expectation 14.00 12.00
124bps
450bps
10.00 8.00 6.00 4.00 2.00 -
AWPR (%) Š Candor Equities Limited Licensed and Regulated by the Securities & Exchange Commission of Sri Lanka
Source: Bloomberg
43
Candor Research Expert Analysis & Insight
CCPI to stands around 5-6% amidst IMF reform package 10.00%
8.00%
6.00%
4.00%
2.00%
-2.00%
2014
2015
Headline Inflation (YoY)
Core Inflation (YoY)
NCPI (YoY)
IMF Inner band (upper limit)
IMF Inner band (lower limit)
IMF Outer band (lower limit)
2016 IMF Outer band (upper limit)
Source: DCS, IMF © Candor Equities Limited Licensed and Regulated by the Securities & Exchange Commission of Sri Lanka
44
DEC
NOV
OCT
SEP
AUG
JULY
JUN
MAY
APR
MAR
FEB
JAN
DEC
NOV
OCT
SEP
AUG
JULY
JUNE
MAY
APR
MAR
FEB
JAN
DEC
NOV
OCT
SEP
AUG
JULY
JUNE
MAY
APR
MAR
FEB
JAN
0.00%
Candor Research Expert Analysis & Insight
Fiscal condition gradually improving curtsey of adhoc revenue measures 160,000.00
+23% (YoY)
140,000.00 120,000.00 100,000.00 80,000.00 60,000.00 40,000.00 20,000.00 Jan
Feb
March 2016
April
May
2015
1H 2016 Government total revenue- LKR 742Bn 1H 2015 Government total revenue- LKR 601Bn Š Candor Equities Limited Licensed and Regulated by the Securities & Exchange Commission of Sri Lanka
June
Source: CBSL
45
Candor Research Expert Analysis & Insight
Fiscal condition gradually improving curtsey of adhoc revenue measures 20.0% 18.0% 16.0% 14.0% 12.0% 10.0% 8.0% 6.0% 4.0% 2.0% 0.0% Revenue & Grants (% GDP)
Total Expenditures (% GDP) 2015 (%1H2015 GDP)
Primary Deficits (% GDP)
Overall Deficits (% GDP)
2016 (%1H2016 GDP)
Sri Lanka is likely to achieve the IMF’s Targets for 2016 (% GDP) • • •
Revenue & Grants- 13% Primary Deficit- 0.8% Overall Deficit – 5.4%
© Candor Equities Limited Licensed and Regulated by the Securities & Exchange Commission of Sri Lanka
Source: CBSL, DCS, IMF
46
Candor Research Expert Analysis & Insight
Risk factors for Interest Rate expectation : Excessive credit growth 40.00% 35.00% 30.00% 25.00% 17.6%
34%
20.00%
7.5%
8.8%
27.3% 25%
15.00% 10.00% 5.00%
Private Sector Credit Growth Source: CBSL © Candor Equities Limited Licensed and Regulated by the Securities & Exchange Commission of Sri Lanka
47
Jul-16
May-16
Mar-16
Jan-16
Nov-15
Sep-15
Jul-15
May-15
Mar-15
Jan-15
Nov-14
Sep-14
Jul-14
May-14
Mar-14
Jan-14
Nov-13
Sep-13
Jul-13
May-13
Mar-13
Jan-13
Nov-12
Sep-12
Jul-12
May-12
Mar-12
Jan-12
Nov-11
Sep-11
Jul-11
May-11
-10.00%
Mar-11
-5.00%
Jan-11
0.00%
Candor Research Expert Analysis & Insight
Excessive credit growth indicate underlying economic activities 1H2016 50.00%
46.10%
45.00% 40.00% 35.00% 29.60%
30.00%
23.30%
25.00% 20.00% 15.00% 10.00%
8.90%
5.00% 0.00% Agriculture and Fishing
Industry
Services
Personal Loans and Advances Source: CBSL
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48
Candor Research Expert Analysis & Insight
Excessive credit growth indicate underlying economic activities 80.00%
45.00% 40.00%
70.00%
35.00%
60.00%
30.00%
50.00%
25.00%
40.00%
20.00%
30.00%
15.00% 10.00%
20.00%
5.00%
10.00%
0.00% Construction
Food and Beverages
Fabricated Metal Products, Machinery and Transport Equipment
0.00% Wholesale and Retail Trade
Tourism
Financial and Communication Business Servicesand Information Technology
Health
Education
However, private sector credit growth to moderate during 4Q2016 amidst fiscal & Monetary policy tightening and slow down in consumption activities Source: CBSL Š Candor Equities Limited Licensed and Regulated by the Securities & Exchange Commission of Sri Lanka
49
Candor Research Expert Analysis & Insight
Surprising relationship 16.00
40.00% 35.00%
14.00
30.00%
12.00
25.00%
10.00
20.00%
8.00
15.00% 10.00%
6.00
5.00%
4.00
0.00%
2.00
-5.00%
AWPR
AWDR
1Y Tbill
1-Aug-16
1-Jun-16
1-Apr-16
1-Feb-16
1-Dec-15
1-Oct-15
1-Aug-15
1-Jun-15
1-Apr-15
1-Feb-15
1-Dec-14
1-Oct-14
1-Aug-14
1-Jun-14
1-Apr-14
1-Feb-14
1-Dec-13
1-Oct-13
1-Aug-13
1-Jun-13
1-Apr-13
1-Feb-13
1-Dec-12
1-Oct-12
1-Aug-12
1-Jun-12
1-Apr-12
1-Feb-12
1-Dec-11
1-Oct-11
31-Jul-11
31-May-11
31-Mar-11
-10.00% 31-Jan-11
-
Pvt. Sect Credit Growth Source: CBSL, Bloomberg
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50
Candor Research Expert Analysis & Insight
Interest Rate Expectation: IR to stabilize over next 6M Horizon Downside Scenario
15.00
12.5%
13.00 11.00
13%
124bps
500bps
9.00 7.00 5.00 3.00 1.00 (1.00)
AWPR (%)
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Base Case
Source: CBSL, Candor Research
51
Candor Research Expert Analysis & Insight
GDP Expectation 12.00% 10.00% 8.00% 6.00% 4.00% 2.00% 0.00% -2.00% -4.00% 2011
2012
2013 Agriculture
Industry
2014 Services
2015
1H2016
GDP
Source: DCS Š Candor Equities Limited Licensed and Regulated by the Securities & Exchange Commission of Sri Lanka
52
Candor Research Expert Analysis & Insight
Subsector wise growth 80.00%
60.00%
40.00%
20.00%
0.00% Manufacture of refined petroleum products
Manufacture of textiles, wearing apparel
Manufacture of machinery and equipment
Electricity, gas
Construction
Wholesale and retail Telecommunication trade
Financial Service
Insurance
-20.00%
-40.00% 1Q2015 (YoY)
2Q2015 (YoY)
3Q2015 (YoY)
4Q2015 (YoY)
1Q2016 (YoY)
2Q2016 (YoY)
Source: DCS Š Candor Equities Limited Licensed and Regulated by the Securities & Exchange Commission of Sri Lanka
53
Candor Research Expert Analysis & Insight
GDP Expectation: Economy to grow by 4.5% in 2016E 12.00% 10.00% 8.00% 6.00% 4.00% 2.00% 0.00% -2.00% -4.00%
2011
2012
2013 Agriculture
2014 Industry
2015 Services
1H2016
2016E
GDP Source: DCS, candor Research
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54
Candor Research Expert Analysis & Insight
Macroeconomic Snapshot
2014
2015
2016E
4.5%
4.8%
4.50%
AWPR
6.26%
7.50%
13.20% 12.5%
Inflation (YoY)
2.10%
2.80%
5.50%
Budget Defict (% GDP)
5.70%
7.40%
5.30%
Gov. Revenue (% GDP)
11.50% 133.37 131.25
13.10%
13.20%
146.00 144.25
150.00 148.00
GDP Growth
Exchange Rate
Source: CBSL, DCS, Candor Research © Candor Equities Limited Licensed and Regulated by the Securities & Exchange Commission of Sri Lanka
55
Candor Research Expert Analysis & Insight
Risk Factors
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Candor Research Expert Analysis & Insight
Our Call on Brexit: Marginally Positive Importance of the UK economy in the world gradually diminishing 4.00% 3.50% 3.00% 2.50% 2.00% 1.50% 1.00% 0.50% 0.00% 25Y ago
10Y ago
5Y ago
2014
UK GDP as a Share of World GDP Source: Bloomberg Š Candor Equities Limited Licensed and Regulated by the Securities & Exchange Commission of Sri Lanka
57
Candor Research Expert Analysis & Insight
Importance of the UK economy in the world gradually diminishing 6.0% 5.0% 4.0% 3.0% 2.0% 1.0% 0.0% 2005
2010
2015
UK imports % Total World imports
Source: Bloomberg Š Candor Equities Limited Licensed and Regulated by the Securities & Exchange Commission of Sri Lanka
58
Candor Research Expert Analysis & Insight
Importance of the UK economy in the world gradually diminishing 4.0% 3.5% 3.0% 2.5% 2.0% 1.5% 1.0% 0.5% 0.0% 2005
2010
2015
UK exports % Total World Exports Source: Bloombergc Š Candor Equities Limited Licensed and Regulated by the Securities & Exchange Commission of Sri Lanka
59
Candor Research Expert Analysis & Insight
UK is an important trading partner for Sri Lanka 16.00 14.00 12.00 10.00 8.00 6.00 4.00 2.00 2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
Total Exports to UK (%)
Source: CBSL Š Candor Equities Limited Licensed and Regulated by the Securities & Exchange Commission of Sri Lanka
60
Candor Research Expert Analysis & Insight
UK is an important trading partner for Sri Lanka 30.00% 25.00% 20.00% 15.00% 10.00% 5.00% 0.00% 2010
2011
2012
2013
2014
SL apparel exports to UK
Source: CBSL Š Candor Equities Limited Licensed and Regulated by the Securities & Exchange Commission of Sri Lanka
61
Candor Research Expert Analysis & Insight
UK is an important economy for Sri Lanka
Tourist Arrivals (2015) From total arivals
China
India
UK
Germany
316,247
214,783
161,845
115,868
18%
12%
9%
6%
Source: Daily FT article By Srilal Miththapala Š Candor Equities Limited Licensed and Regulated by the Securities & Exchange Commission of Sri Lanka
62
Candor Research Expert Analysis & Insight
Brexit would be marginally positive for Sri Lanka due to historical trade & political relationship with UK
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63
Candor Research Expert Analysis & Insight
Sri Lanka Vs Vietnam (Well Structured FTAs are the key to success) 12,000 10,000
180,000.00
Sri Lanka
2X
160,000.00
Vietnam
10X
140,000.00 120,000.00
8,000
100,000.00
6,000
80,000.00
4,000
60,000.00 40,000.00
2,000
20,000.00 -
0
2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015
2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 1.2000
Total Exports Vietnam (USD)
Total Exports SL (USD) 14.00
1.0000
12.00
0.8000
10.00
0.6000
8.00 6.00
0.4000
4.00
0.2000
2.00
0.0000
0.00
FDI (USD.Bn) © Candor Equities Limited Licensed and Regulated by the Securities & Exchange Commission of Sri Lanka
FDIs (USD.Bn)
Source: Bloomberg
64
Candor Research Expert Analysis & Insight
Checklist Positive • Exchange rate to remain stable • Interest rate regime to stabilize over next 6M horizon • Moderate inflation regime • Stable earnings prospect on CSE counters
Risk Factors • Excessive Private sector credit growth • Effective implementation of the Budget 2017 and policy uncertainties & inconsistency • Lack of policy reforms for export sector © Candor Equities Limited Licensed and Regulated by the Securities & Exchange Commission of Sri Lanka
65
PE-20x PBV-3X
8,000
Market Outlook: We presume the downside risk would be minimal due to the expected favorable Macroeconomic outlook
*
7,000
+22%
PE-11x PBV-1.5X
6,000
4,000.00
PE-13.7x PBV-1.5X
PE-12x PBV-1.6X
-7%
3,000.00 -6%
+22%
-9%
-4%
PE-15x PBV-1.6X
+4%
5,000
PE-13x PBV-1.4X
1,000.00 PE-13.2x PBV-1.5X
4,000
-
3,000
(1,000.00) 1Y Tbill- 9.3%
2,000
1Y Tbill- 11.69%
1Y Tbill- 8.29%
2012
2011
1,000
NFI-(LKR19Bn)
1Y Tbill-6.01%
2013
NFI-LKR 39Bn
1Y Tbill-7.30%
2014
NFI-LKR 23Bn
1Y Tbill-10.24%
2015
NFI-LKR 22Bn
2016
NFI-(LKR 5.3Bn)
NFI-(LKR 2.2Bn)
-
(2,000.00) (3,000.00)
3-Jul-16
3-May-16
3-Mar-16
3-Jan-16
3-Nov-15
3-Sep-15
3-Jul-15
3-May-15
3-Mar-15
3-Jan-15
3-Nov-14
3-Sep-14
3-Jul-14
3-May-14
3-Mar-14
3-Jan-14
3-Nov-13
3-Sep-13
3-Jul-13
3-May-13
3-Mar-13
3-Jan-13
3-Nov-12
3-Sep-12
3-Jul-12
3-May-12
3-Mar-12
3-Jan-12
3-Nov-11
3-Sep-11
3-Jul-11
3-May-11
3-Mar-11
(4,000.00) 3-Jan-11
ASPI
2,000.00
NFI
Net Foreign Inflow (LKR.Mn) ASPI Macroeconomic Indicators
CCPI-4.9% Budget-D-6.9% BOP –D-USD1061Mn Credit Growth-34% Currency-D- 3% Overheated economy
CCPI-9.2% Budget-D-6.5% BOP –S-USD151Mn Credit Growth-17.6% Currency- D- 12%
CCPI-4.7% Budget-D-5.4% BOP –D-USD985Mn Credit Growth-7.5% Currency- D- 3%
Tightening measures
* At these PE and PBV levels foreign attraction has been boosted
CCPI-2.1% Budget-D-5.7% BOP –S-USD1369Mn Credit Growth-8.8% Currency-D- 1%
Stimulus to boost the economy
CCPI-2.8% Budget-D-7.4% BOP –D-USD1489Mn Credit Growth-25% Currency- D- 10%
CCPI-4.2% Budget-D-5.4% (IMF) BOP –S-USD356Mn Credit Growth-27.30% Currency-D- 2%
Overheated economy
* At these PE and PBV levels foreign attraction has been contracted
Tightening measures
Candor Research Expert Analysis & Insight
Market & prospective sectors
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Candor Research Expert Analysis & Insight
ASPI dropped by 6% YTD basis 7,000.00 6,800.00
-6% (YTD)
6,600.00 6,400.00 6,200.00 6,000.00 5,800.00 5,600.00 5,400.00 5,200.00
ASPI Š Candor Equities Limited Licensed and Regulated by the Securities & Exchange Commission of Sri Lanka
Source: Bloomberg
68
Candor Research Expert Analysis & Insight
Foreign purchases % Total TO 100.0% 90.0% 80.0% 70.0% 60.0% 50.0% 40.0% 30.0% 20.0% 10.0% 0.0% 1/4/2016
2/4/2016
3/4/2016
4/4/2016
5/4/2016
6/4/2016
7/4/2016
8/4/2016
9/4/2016
Foreign TO % Total TO
Source: Bloomberg Š Candor Equities Limited Licensed and Regulated by the Securities & Exchange Commission of Sri Lanka
69
Candor Research Expert Analysis & Insight
Foreign purchases % Total TO 40.0%
36.1%
34.4%
35.0% 30.0%
27.6%
24.9%
25.0% 20.0% 15.0%
10.9%
10.0% 5.0% 0.0% 2012
2013
2014
2015
YTD
Total Foreign Investor Contribution Source: Bloomberg Š Candor Equities Limited Licensed and Regulated by the Securities & Exchange Commission of Sri Lanka
70
Candor Research Expert Analysis & Insight
Recently active foreign funds • Schroder asian total return fund • Schroder frontier markets equities • Matthews emerging asia fund • T. Rowe Price - Frontier Markets Equity Fund
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Attractively priced relative to Regional Peers PER
PBV
Sri Lanka
13.3
1.5
Pakistan
11.1
1.9
Vietnam
16.3
1.9
Bangladesh
23.0
4.0
PER
PBV
Sri Lanka
13.3
1.5
India
21.0
2.6
Philippines
21.0
2.4
Malaysia
18.2
1.7
Thailand
17.0
1.6
“Attractively priced compared to Asian Frontier Markets”
Source: Bloomberg
Source: Bloomberg
“Attractively priced relative to Emerging Asian Markets”
Candor Research Expert Analysis & Insight
Prospective Sectors • Construction Sector • Building Materials • Manufacturing Sector • Consumption based companies • Commercial Banks • Power & Energy
© Candor Equities Limited Licensed and Regulated by the Securities & Exchange Commission of Sri Lanka
73
Candor Research Expert Analysis & Insight
Key Takeaways •Overheated Economy (2011,2015)- Realize some profits •Tightening cycle (2012, 2016)- Selective accumulation
© Candor Equities Limited Licensed and Regulated by the Securities & Exchange Commission of Sri Lanka
74
Candor Research Expert Analysis & Insight
Thank You
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