Banking, telecommunication and consumer-related stocks on the Colombo Stock Exchange (CSE) are more likely to outperform the rest this year, after a tumultuous ride in 2018, where notable erosions in valuations stoked by international and domestic headwinds, were seen.

The research arm of the Colombo-based equities brokerage, Asia Securities, picking possible winners this year, out of the 12 sectors covered, said it rates three sectors positive – banking, telcos and consumer – while leaving the rest with a neutral view. 

“Asia Securities Research expects the Sri Lankan stock market to offer pockets of opportunities for investors, in the year ahead, despite the expectations that 2019 will in general be a challenging year for equities,” said the stockbroking firm while recommending clients to take positions in stocks with specific growth opportunities in the current environment. 

It expects the banking sector to deliver relatively strong earnings this year with the high impairments falling away. 

Banks generally cherish higher rates as they can charge high on loans expanding their net interest margins – the difference between what they charge for the loans and what they pay for taking deposits. 

Although the rising rates will raise the rates offered on deposits in tandem with loan rates, in reality, the banks raise their lending rates faster than the deposit rates, which results in higher margins and profits. 

The banking sector in 2018 became the casualty of the rising rates and some targeted taxes, such as the Debt Repayment Levy, dented the profits and quality of the assets.  

Meanwhile, Asia Securities Research also expects the recent reduction of the telco levy to offer some tailwind for the telecommunication sector. 
The consolidation seen in the industry with the recent merger between Etisalat and Hutch will ease the competitive pressure on the telcos, buttressing the earnings, as the telcos are required to continuously invest in newer technology and such investments will generally have longer gestation periods. 

Meanwhile, the consumer sector, which comprises of fast-moving consumer goods and retail, is expected to deliver strong earnings this year, after a dismal 2018.

The consumer-driven stocks were impacted last year due to the poor consumer sentiment, caused by the tight policies instituted to cool the 
consumer demand. 

But as many people join the middle and upper-middle income segment, they demand more consumer goods and modern trade stands to benefit. 
Besides the three segments, Asia Securities singled out the manufacturing sector, where export-oriented companies are expected to see better results with the weakening rupee boding well for their performance. 

Currently, the CSE’s All Share Price Index (ASPI) trades at 8.5 times the trailing price-to-earnings multiples, down from 10.1 times at the beginning of 2018.  

Further, the ASPI is trading at a 20 percent discount to the overall MSCI Emerging Markets Index, which is the largest discount seen in the last five years, the data from Asia Securities Research showed. In 2018, the CSE saw Rs.9.6 billion foreign outflows compared to an inflow of Rs.28.5 billion in 2017, which caused a dip in valuations. 

Asia Securities Research is of the belief that the domestic risks will continue to keep the foreigners on the sidelines. 

It cited the delayed budget reading, which creates uncertainty about fiscal measures, debt maturities of US $ 5.9 billion and heightened refinancing risks amid credit downgrades and the uneasy alliance between the executive and UNF government are raising major concerns on continuing policy divergence. 

“In addition, given the current high interest rate environment, the local high-net-worth and retail investors may favour the fixed income asset class and take a wait-and-see approach toward equities. Overall, these developments will drive soft momentum in 1H CY19,” they added. 

Nevertheless, it said some of the recent developments such as the re-engagement with the International Monetary Fund and other funding lines, managing the repayment of external debt payments, pick up in agriculture and related household income, better consumer demand, continued low oil prices and lower currency depreciation could bode well for rekindling investor confidence.