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The recent market rally which has blessed the Colombo Stock Exchange (CSE) is now more than two months old,  and trading in August also commenced with the same energy levels as to indicate the momentum has more life.

The All Share Price Index (ASPI) which started its north bound journey from 6,270 levels end May has now surpassed 6,800 levels. This 550 odd points jump in the index during the past couple of months is reflective of a near 9 percent gain in the ASPI and the broad market.

When trading is good and everyone involved in the markets are in a rather joyous mood, positive stories and news of continuous gains are plenty.
At the CSE also at present there is no exception, expectations of the ASPI surpassing 7,000 levels and even the possibility of reaching a new index high by end of the year been beliefs shared by many. Therefore it seems like the mini rally would still have more steam to run on.

Healthy trading volumes

Trading volumes and the turnover continued to be healthy with the past couple of weeks recording an average daily turnover of over Rupees 1 billion with foreigners continuing to be net buyer to the tune of Rupees 1.1 billion. 2014 thus far has been a good year in terms of portfolio money inflows while total net foreign purchases year to date at the CSE been Rupees 10.4 billion.

This encouraging development has enabled market growth and stability while at a more macro level assisted in growing the foreign reserves and maintaining exchange rates.
Few weeks back I raised the question whether this quick upswing in the index is likely to sustain or end in a correction? Back then my answer was, “yes the speed of index growth is not sustainable and it could slowdown, but the overall upward trend in the index could be maintained as long as foreign buying continues to assist the CSE” which I stick by even today.

Mammoth support

Further local institutional activity and the retail participation in the market which has increased sharply from a near nonexistent level at the beginning of the year is giving a mammoth support to both market liquidity and index growth. Another healthy development I see is that this time around and at least for the moment the retail clients are not blindly chasing stocks but are having some basis to their stock pickings. The blue chip heavyweights have thus far shouldered the market rally with participation been more broad based than before, but going forward the medium to low cap stocks also would attract added interest but with some fundamental rationale. However the possibility of irrational stock pickings and share prices reaching absurd levels cannot also be written off since the CSE is yet another equity exchange where human phycology plays a big role.

Currently the overall market trades on 15.4 x trailing 4 quarterly earnings and though seems to be expensive I think the re rating of the country and the attractiveness of Sri Lanka in comparison to other frontier markets (though may only be marginal) has enabled the stocks listed on the CSE to attract a higher multiple than previously. Also with the listed corporates having started releasing their June results, I do expect the market multiples to remain sticky, which is good since it indicates corporate profit growth.

Double digit growth

The results released by few large listed corporates have been encouraging, with profit growth hitting double digit figures with some companies having grown their earnings by over one thirds. Some of these listed names have achieved healthy profit growth numbers not through their recurring businesses but through various capital gains, nevertheless it seems still valid and would assist the market activity and index growth.
Few banks too have released their results, which again is good news since the reprising of their deposits had enabled them to make larger profits though loan growth has not shown any improvement as at June.

The positive is that this scenario is changing. Despite sluggish loan growth through corporate clients the banking sector is seeing slow but steady growth in lending from the retail sector and with reality setting in as per the sustainability of the low interest rate environment take up of loans would increase. Credit growth is good for the markets since some of those monies could end up in listed equities but more so it creates positive economic sentiment and change the overall market psychology for the better. Also during the past few days many companies have made announcements with regards to the planned and/or agreed mergers and acquisitions in the banking and other lending institutions sectors.

Consolidation impact

This consolidation exercise initiated by the Central Bank and now which has become reality would improve the overall risk profile of the banking and finance sector of the country, which is good. However in the short term some acquisitions could lead to marginal weakening of the acquirers balance sheet by absorbing weak finance companies though in long term perspective would create macro stability. These changing dynamics within the finance sector is keeping the financial markets upbeat.  

 Also another point of view which is worthwhile specially for retail investors would be to look at high dividend yield stocks. With the fixed deposit rates having nose-dived, investors who are more focused on periodic cash inflow could pick the listed stocks having a high consistent pay out.  

Some of the listed names could provide higher dividend returns which could be well over the available market deposit rates with the added bonus of a capital gain possibilities. Furthermore, if an investor is more biased towards capital gain opportunities, it is also worthwhile trading on fundamentally strong counters with a strong sense of discipline with regard to realizing profits and cutting losses.