8 December 2023 12:00 am Views - 767
Sri Lanka’s listed corporates seem to have emerged from the earnings recession that affected the stock market over several quarters, and analysts anticipate a modest rebound starting from the current quarter, potentially bolstering stock indices by the year-end and beyond.
First Capital Research (FCR) opined that corporate earnings bottomed out in the third quarter of 2023 when such earnings slowed their decline to 5 percent after slumping 65 percent and 70 percent respectively in the first and the second quarters this year, which were more severe than initially anticipated.
This in fact had a bearing on FCR’s 2024 year-end call for the All Share Price Index (ASPI) which they lowered to a range between 13,000 and 14,000.
“Market earnings are to recover from 4Q2023 onwards. However, market earnings for 2024E in absolute terms was tamed down amidst the steep drop in 2023 earnings, pushing the PER to 12x on 2023E earnings,” FCR said in their latest Equity Strategy Report released recently.
They expect the 4Q earnings to have recorded a 1 percent growth from a year ago levels, setting off a continued rebound in the quarterly earnings pushing the benchmark indices higher, making stocks again investable.
Their earnings forecasts are also in line with the growth anticipated in the economy which is expected to have rebounded from the fourth quarter in 2023, although the overall economy would still end up in a decline by about 3.0 to 4.0 percent compared to 7.8 percent contraction in 2022.
They also projected a 3-4 percentage growth in the GDP in 2024 and 2025 as the economy gradually recovers from the economic crisis.
While the declining interest rates are going to be a major catalyst for the equities to perform better as expected, FCR however highlighted potential political risks coming from the scheduled elections next year to somewhat dampen the rally and investor sentiments.
They also said the potentially successful completion of the external debt restructuring, progress on State owned Enterprise reforms and the release of the second tranche of the International Monetary Fund will also influence in building investor confidence and bringing the yields of the government securities further down.
Due to their bullish calls for equities, FCR recommended equity funds to raise their equity exposure to 100 percent from their earlier 85 percent while reducing their cash exposure to zero.
“Out of the funds purely allocated for equity we have been advising on investing the funds partially in equity and balance to retain in cash due to the high interest rates, weak corporate earnings and slow recovery process in the economy,” FCR said.
“With the completion of debt restructuring, Sri Lanka’s debt is likely to be classified as sustainable, improving confidence and pushing yields down. Thereby, in relation to the equity allocated funds, we recommend to be fully invested,” they added.