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08th March 1998

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Negative sentiment rubs shine off company profits

Last quarter earnings of Sri Lankan companies have shown record gains, providing a strong foundation for market improvement, but poor sentiment continues to hold back the market.

"Foreigners look at the market on a top down approach," says Devapriya Ellepola, Deputy General Manager of Jardine Fleming HNB Securities.

Last week's bomb is likely to reinforce the position of many foreign investors who put macro issues before individual company performances.

"External factors like the East Asian crises keep investors back, so do terrorist risk and an El Nino inspired drought," says Nouzab Fareed, Deputy Director Research at Mercantile Merchant Bank. "The market is not reflecting company fundamentals, which are very good."

Negatives hanging over Sri Lanka include an election, which might induce fiscal slippages, an escalation of the war, and being hit by the cheap currencies of East Asia and also India. However with the more reform minded Congress coming off weaker in the recent election, a very sharp devaluation seems unlikely.

In Sri Lanka earnings of most companies have been very strong in 1996. Fourth quarter '97 results of 129 companies tracked by South Asia Securities Information Network have shown a 109 per cent increase compared with the fourth quarter of 1996.

Aggregate profits have jumped from Rs. 1,453 mn to Rs 3,023 mn for the period.

One reason for the big jump is that 1996 was a particularly bad year.

"Because we started with a low base there is a big gain," says Mr. Ellepola.

EPS growth of top 30 or 40 companies tracked by Jardine Fleming is more than 25 per cent for the year. The 98 JF forecast for Sri Lanka is 33 per cent, which is higher than the South Asian average of 25 per cent. Pakistan comes second with a 24 per cent forecast EPS growth followed by India at 10 per cent.

"Looking at the market from a bottom up approach there is value," says Mr. Ellepola. "You have to pick good stock and park your funds." The market is also the cheapest. Based on forecast 1998 earnings, the market price earnings multiple is only 7.7, which is lower than India (9.9) and Pakistan (9.8), and very much lower than East Asian nations.

In January foreigners sold Rs 143 mn more shares than they bought. But the outflow was down to Rs 95 mn in February. In the first week of March foreign sales were only marginally higher than purchases. But then came the Maradana bomb, which is unlikely to do much good either to the country's overall image of earnings of tourist sector companies listed in the market.

Confidence attracts Lankans

Mercantile Merchant Bank Ltd (MMBL) has teamed up with a Malaysian financial house Rashid Hussein to manage an investment fund in Malaysia.

"The purpose of setting up the fund, which will be called Confidence in Malaysia Fund (CIMF), is to attract high net worth investor groups, primarily from USA, to invest in Malaysian companies," MMBL said in a statement.

A memorandum of understanding was signed in Malaysia with Milinda Moragoda and Udakka Tennekoon representing MMBL and Tan Sri Abdul Rashid Hussein and David Lee representing Rashid Hussein Asset Management (RHAM).

MMBL will act as fund manager to CIMF and RHAM as investment mangers.

MMBL will be responsible for securing US investment for the CIMF.

The new fund capitalised at US $ 50 mn is expected to identify 15 to 20 well managed Malaysian companies needing a cash injection.

Another view of the Asian crisis

The winds of change in East Asia and South East Asia have not yet blown over. The first repercussions have not proved too destabilising for us. The massive competitive devaluation that was expected by many did not take place. The currency has been depreciated by only about 10% as a consequence of the Asian crisis. It has also given us an opportunity to review our own strengths and weaknesses and to take action to prevent similar happenings in Sri Lanka.

While the immediate impact has not been disastrous there may be further fall- outs that could have a depressing impact on our economy. It is a cliche to say that the economies of the world are highly inter-dependent. The crisis in Asia is bound to have an impact on the West. There could be lay-offs of employees and adjustments in the American and European economies. Certainly these would not be serious dents on their economic progress or stability. Yet their economic growth is likely to suffer and international trade is likely to expand slowly. The reduced world economic growth would indeed reduce exports from countries like ours. We should expect it to some extent. External shocks of this nature have been significant in the economic history of our country. We must be prepared to meet the challenges.

More specifically the Sri Lankan economy has already felt the impact in terms of potential Asian investments not coming to us. In fact some promises have already been broken. Just as when these economies were poised to invest heavily in Sri Lanka, due to no fault of ours but the financial crises that erupted in their countries, they have denied us much needed foreign investment. Consequently our own economic growth and especially infrastructure development may be retarded.

While the overriding focus of attention here has been the impact of the crisis on Sri Lanka, we should also be mindful of the strengths of these Asian economies. There were fundamental economic strengths which cannot be denied and provide a basis for an early economic recovery.

These economies have a high level of national savings and therefore even if foreign investments decline, their domestic investment is sufficiently high to ensure a fairly high rate of economic growth.

These economies have developed their infrastructure and minimal investments are required in this all important pre-requisite to economic growth. They have also developed adequate skills, but much more importantly possess a work ethic which is envied by the rest of the world.

The commitment of their people to hard work and discipline is indeed a vital component of their economic strength. Perhaps the crisis could further strengthen this virtue of theirs.

It is now quite apparent that apart from the dependence on external finance, these countries exhibited weaknesses in their financial systems. Much of this weakness was owing to political corruption with those in power turning a blind eye or conferring benefits on their kith and kin.

There has also been a political convulsion in some of these countries and a questioning of their political organisations and methods of electing their leaders. The biggest difficulty that these countries would have to cope with is how to put their political systems back into order in order to undertake changes and inspire the confidence of their people.

Once this is restored, there is little doubt that their economic strength would come into play and a new wave of economic growth would be inevitable.

In planning out our own strategies, we must examine the weaknesses of these economies, recognise their strengths, realise the immediate and later impacts of the crisis and also be prepared to capitalise on new opportunities that may be available both due to the crisis and the recovery which would take place.

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