Sri Lanka’s ‘dichotomy’ appears to be correcting?

• Country fourth fastest growing economy in the world, but Bourse is world’s third worst performer

The dichotomy of Sri Lanka of being among the fastest growing emerging economies and worst performers when it comes to the stock market appears to be correcting, according to broking firm DNH Financial.

It said contrary to some market commentators, Sri Lanka does not necessarily share the same economic fragility or uncertainty in the Eurozone or the US, given the country’s robust domestic consumption cycle that underpins its economic growth.
“While there has been much concern over the prospect of a slowdown in real GDP growth (on the back of high commodity prices and a rise in interest rates), we believe that a modest slowdown from last years’ growth levels may indeed be inevitable this year,” DNH said.
“However, prospects for the medium to longer term are likely to remain intact as economic activity in the northern and eastern parts of the country becomes more apparent and GDP contribution from the aforementioned are as becomes absorbed,” it added.
Based on the latest available economic data, Sri Lanka is still amongst the top five fastest growing countries in the world overtaking traditional emerging market favourites such as China and India and other BRICS economies, DNH said.
“We view this performance as highly encouraging and indicative of the country’s economic resilience and strength in an environment of globally heightened risk,” the broking firm emphasised.
“Conversely however the Sri Lanka Bourse has been the third worst performer on an YTD basis after Cyprus (-68%) and Ukraine (-33%) declining by 24% largely as a result of lacklustre domestic investor sentiment. This dichotomy which now appears to be however correcting,” DNH said, given the 6% rise in the market last week and year-to-date negative return dipping below 10%.
“We expect the current momentum in the market to continue although intermittent bouts of profit taking could slow down growth,” DNH said.
Even though the threat of continued high oil prices loom large, DNH views the current market environment as an opportunity for investors to enter quality stocks on a selective basis in order to take advantage of the market’s anticipated ascent.
“We continue to advise investors to focus on companies that will generate sustainable earnings, have limited energy requirements as part of their cost structures and are relatively underleveraged,” the broking firm added.
Although some market commentators may begin to question the sustainability of Sri Lanka’s economic growth pointing to the possibility of a deceleration given the impact of high oil prices and Balance of Payments pressures, we believe that economic growth will still continue at above average levels compared to most other emerging markets.
Additionally, shrugging off the sceptics who may still argue that the performance of the Sri Lanka Bourse is inextricably linked to the performance of global markets, given its reliance on domestic factors, the Bourse is likely to prove significantly independent of external forces and will be spared much of the contagion that is sweeping through major markets in Europe as a result of the Eurozone debt crises, DNH said.