Business Times

Time to kick in fundamentals to the bear market

Sri Lanka is an exciting capital market, it has done amazingly well, but it’s now expensive as its valuations are stretched and its risk is priced too low, according to experts. Shamubeel Equib, Consultant Economist Heraymila Securities Ltd, speaking at a panel discussion on the stock market organised by the Institute of Chartered Accountants of Sri Lanka (ICASL) said that a pause now (in the bear run) would reduce future risks.

“While Sri Lanka is trading at 25 times Price to Earnings ratio (PE), other frontier markets look less expensive. The Guggenheim Frontier Markets Exchange Traded Funds (ETF), which trades on the New York Stock Exchange traded on a seven times PE earlier this month. The Power Shares MENA Frontier Countries ETF traded at 12 times PE,” he said.

He noted that the share market has run very hard, it has doubled over the past year, which reflects many things, growth, stability, low interest rates and possible tax concessions. Don LaGuardia, Principal LR Global agreed at the forum that the Colombo Stock Exchange (CSE) is priced high now at 28 times trailing earnings against Vietnam at 10 times, Qatar at 12 times, and Nigeria at 13 times.

“Sri Lanka’s market as a whole may not be the cheapest in the Frontier Market universe; although some individual stocks look undervalued,” he said, adding that there’s substantial room for additional listings and secondary offerings to improve free floats.

“Growth will be bolstered by a construction boom as the North and East reintegrate and increasing tourist arrivals as well as the low cost, educated labour force makes it an attractive frontier market,” Mr. LaGuardia, keynote speaker at the forum, said.

Chitra Sathkumara, CEO Ceybank Unit Trust noted that the CSE is trading at high multiples, based on historical analysis. “In the early ‘90s when the interest rates and inflation was high together with the interest rates, the CSE was trading at high multiples. Now the situation is different (low interest rates/ low inflation) as there’s stability and peace and we’re looking forward to 2012 corporate earnings,” he noted.

Responding to a question about market manipulation, Ray Abeywardena, Director Acuity Stockbrokers said that there isn’t a ‘collection of stockbrokers’ manipulating the market, but there is manipulation being done individually.

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