While the Sri Lankan economy is very bullish, the same cannot be said about its share market, economists and analysts say.
“It is true that the market moves before the economy and we have seen it already such as for two years of 100% plus returns. Hence the market has now fully discounted the growth story in the economy and is now actually slightly overvalued as a whole,” Deshan Pushparajah, Manager Corporate Affairs, Capital Alliance Holdings Limited said.
He said that there are still a few shares out there with value, but the market as a whole needs to saturate/ correct a bit to make economic sense. He added that returns on the equity market will come down to more reasonable levels and will require investors to keenly seek out value stocks.
“The best way to now make full use of the bullish economy would be to actually invest on the ground instead of the financial markets. Private equity comes to mind as a viable alternative,” he added.
He agreed that tourism is doing well, industries are growing at a rapid rate, corporate earnings are showing substantial improvements, the exchange rate is stable and appreciating, and inflation is under control, interest rates are at an attractive level for a developing country such as Sri Lanka. “Business confidence is at its peak. However, the same cannot be said about the share market.”
Milinda Ratnayake, Analyst SMB Securities said shares have reached new highs by climbing rapidly as a result of the war premium and as a result of future economic prosperity. “However, going forward the stock market will have a new formula for success: a slow and steady trek, but the big question is whether the climb can hold,” he said.
He noted that the Sri Lankan economy has benefited immensely since the end of the war and investors are signaling that they expect the economy to strengthen further by placing their money in strategic investments.
Analysts said that economic growth is expected to hover around 8% + levels in the medium term, as Sri Lanka’s inflation have been at manageable levels. “In line with inflation expectations interest rates have been moderate and conducive for economic growth. Foreign reserves have been at an all time high level. On the fiscal side government needs to rationalize government spending in order to maintain fiscal discipline,” an analyst said.
Nikitha Tissera, Head of Research Sampath Securities said that equities indeed are a 'leading indicator' of a country's economic performance. “That is the reason the country grew by 8.5% per year and the equities grew by 135%. We will await the rest of the corporate earnings this quarter to give us some guidance into the direction of the share market,” he added.